Leakage: It’s A Big Problem (But Perhaps Not The Problem That You Thought It Was)

Leakage: It’s A Big Problem (But Perhaps Not The Problem That You Thought It Was)

David I Gensler, MSPA, MAAA, EA

“Leakage” sounds like something seniors need to worry about. It is certainly not a term that one would associate with a 401(k) plan. But leakage can come in many different forms. And in a recent article in the Wall Street Journal, it is leakage from their 401(k) plans that has many American companies concerned.

Leakage is a term from the retirement plan industry that is used when participants tap into or pocket retirement funds early. The article stated that this practice can cause an employee’s ultimate retirement nest egg to shrink by up to 25%.

Many employers have taken some aggressive steps (like auto-enrollment and auto-escalation) to encourage their employees to save in 401(k) plans. But like a bucket with a hole in it, while those savings find their way into a company’s 401(k) plan, there is a growing awareness that the money is not staying there. If older workers cannot afford to retire, it can create a logjam at the top, leaving little room for younger, less-expensive hires.

Leakage primarily takes two forms: loans and distributions that are not rolled over. Let’s look at each one and see how some companies have found some ways to, if not solve the problem, at least slow it down.

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