Congress’ Joint Committee on Taxation recently issued a report detailing its review of 16 years of retirement plan withdrawal information. We anticipate the findings in the report will drive some of the legislative initiatives impacting 401k and 403b Plans in the next few years.
Among the Committee’s findings was that pre-retirement withdrawals by working-age individuals are a significant drain on the retirement savings of that group. This is referred to as “leakage” from retirement accounts. The report estimated that approximately 22% of the retirement contributions made to retirement accounts in a given year for those age 20 to 50 “leak” out of the accounts each year.
Although a significant part of the leakage is the result of termination of employment, “in-service withdrawals” – distributions while working – are a contributing factor. An employer who is concerned that employees will not have sufficient retirement savings to retire, or retire with dignity, may want to re-think the inclusion of in-service withdrawal rights in the Plan.
When ACSI sets-up a 401k or 403b Plan for a client, we often discourage the adoption of an in-service withdrawal feature. Unfortunately, for existing Plans, certain in-service withdrawal rights are “protected benefits” under current rules, which cannot be eliminated with respect to prior contributions. Nevertheless, there are ways to amend the Plan terms and, at a minimum, eliminate the right to withdraw from future contributions. Doing so may improve the retention of dollars in the Plan for employees.
ACSI (www.acsi-ny.com or email@example.com) is available to discuss in-service withdrawals from your Plan.