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Public Statements

Statements on Introduced Bills and Joint Resolutions

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Location: Washington, DC

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS

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Mr. KOHL. Mr. President, today I am introducing the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011, otherwise known as the SEAL 401(k) Savings Act. This bill, which I introduce together with my friend Senator MIKE ENZI, will reduce leakage from retirement plans and help ensure that retirement savings in defined contribution plans last throughout retirement.

With the recent shift from defined benefit retirement savings plans to 401(k)-type defined contribution plans, many Americans are now responsible for making the proactive decision to save for their retirement. These decisions include how much to save and where to invest their savings. Meanwhile, they also must resist the urge to tap into their savings in times of hardship through withdrawals and loans.

During these difficult economic times, we are increasingly seeing 401(k) funds being treated as rainy day funds, as participants take out withdrawals and loans. According to a recent study by Aon Hewitt, as of the end of 2010, about 28 percent of active participants in defined contribution plans had an outstanding loan. This is a record high. Withdrawals from defined contribution plans also have increased since the 2008 financial crisis. This leakage from these plans can significantly reduce workers' savings and put their retirement security at risk.

To determine how to best tackle the issue of leakage from retirement plans, the Special Committee on Aging, of which I chair, held a hearing in July 2008 entitled, ``Saving Smartly for Retirement: Are Americans Being Encouraged to Break Open the Piggy Bank?.'' The Committee also requested a GAO report entitled, ``401(k) Plans: Policy Changes Could Reduce the Long-term Effects of Leakage on Workers' Retirement Savings,'' which was released in August 2009.

The SEAL 401(k) Savings Act builds on the recommendations the Committee received from witnesses during our hearing and from the GAO and would reduce leakage and increase retirement savings. First, the bill would extend the time workers have to repay loans. When an employee with a 401(k) plan loan loses his job, he generally is put to the choice of defaulting on his outstanding loan and incurring tax penalties or immediately repaying the entire outstanding loan balance. Paying back a loan after just losing your job can be difficult so our bill would give people more time.

While having access to a loan in an emergency is an important feature for many participants, a 401(k) savings account should not be used as a piggy bank for revolving loans. Also, the administrative burden of managing multiple loans for a few individuals can increase the costs for all workers in a plan. The SEAL Act reduces the overall number of loans that participants can take to three at one time. Currently employers determine the number of loans available, and many employers, like the Federal Thrift Savings Program, have chosen to restrict the number of loans to reduce leakage and overall cost.

The bill also would allow 401(k) participants to continue to make additional contributions during the 6 months following a hardship withdrawal. Currently, after an employee takes a withdrawal from a 401(k) plan due to a hardship, he or she is prohibited from making contributions to the plan and all other plans maintained by the employer for at least six months. This loss of both employee contributions and company matching contributions during this period can exacerbate the long-term negative effects on retirement savings.

Finally, the bill would ban products that promote leakage, such as the 401(k) debit card. By offering a 401(k) debit card, plans send the message that it is okay to use your retirement savings for every day purchases, despite the fact that the high fees associated with its use will drastically diminish their savings.

I look forward to working with my colleagues to pass this important legislation.

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