SEAL 401k Savings Act

When times get tough, sneaking savings from your 401k is tempting. More and more Americans are choosing to withdraw these enticing earnings early and employers have to pay up their vested matches. Some savings are loaned out with no limitations. This creates leakage that lawmakers, like Senators Herb Kohl, D-Wis., and Mike Enzi, R-Wyoming are trying to reduce with legislation. On May 18, they presented their Savings Enhanced by Alleviating Leakage in 401k Savings Act of 2011 (SEAL 401k Savings Act) to congress, which could change the rules on 401k loans and repayment.

“The gap between what Americans will need for retirement and what they will actually have saved is estimated to be a staggering 6.6 trillion dollars,” says Kohl. “While having access to a loan in an emergency is an important feature for many participants, a 401k savings account should not be used as a piggy bank.”

Once someone takes money from their 401k it is not likely they will replace the cash. According to Aon Hewitt, an employee benefits consultant, their 2010 Employer Expectations on Defined Contribution Plan Leakage Survey shows an increase in loan activity and withdrawals. Aon’s results also prove employer concerns for hardship withdrawals and excessive loan usage. New legalities could create a protective “seal” for these retirement accounts.

This new bill could impact the replacement and loan aspect of the current banking blunder. The SEAL Act might extend rollover periods for loans. Currently, if a person loses their job, they have to decide on defaulting on the outstanding loan payments, thus acquiring tax penalties, or paying everything back immediately. It would also reduce the total loans an account holder can take out at a time. Today, employers decide this amount, and SEAL would mandate the number to three loans. With the new bill, employees may have until they file their taxes to pay the funds through contributing to an IRA.

Once someone takes a hardship withdrawal, they are not allowed to make contributions and receive employer matched contributions for six months. The SEAL Act would take away this limitation. There are also changes in store for 401k financial products. Products like the 401k debit card, that some companies promote, encourage leaked funds and create more fees. These types of products could be banned.

Retirement and recession go hand in hand. Congress is not ignoring the fact that Americans may be struggling, and this bipartisan bill is an attempt to make saving easier on everyone.