SEAL 401(k)Savings Act

Mr. President, in February the Committee on Health, Education, Labor, and Pensions held a hearing on the success of the automatic enrollment provisions of the Pension Protection Act of 2006 which helped millions of workers and their families access to a 401(k) retirement savings accounts. Because of the Pension Protection Act, we greatly expanded retirement savings and individuals ability to put money away for their golden years.

Just last week, Fidelity Investments released a report that employer- sponsored retirement plans with an automatic enrollment feature have an overall participation rate of 82 percent compared with only 56 percent without automatic enrollment. The Fidelity report also indicated that average account balances for 401(k) and similar retirement accounts have reached an all-time high. This is some good news to show that workers and their families retirement accounts are coming back from the economic distress of just a few years ago.

While our Nation's 401(k) retirement system is providing greater opportunities for individuals to save, there is still room for improvement. Recent studies have shown that money saved in 401(k) accounts sometimes ``leaks'' out of the system and is never put back. AonHewitt released a report this week showing that unpaid loans, withdrawals and cashouts of 401(k) monies, otherwise known as ``leakage,'' can have a substantial effect on how much money ultimately will be there for retirement. According to the AonHewitt report, an individual who ceases to make loan repayments during the loan term is expected to erode future retirement income by 10 to 13 percent. If the individual has two loans and payments are not made then the reduction in retirement savings nearly doubles. In the event of a complete default of the loan, then the monies are permanently gone from the retirement system.

Today, I join the Chairman of the Senate Aging Committee, Senator Kohl, in taking the first step in helping to stop leakage in the retirement system. Chairman Kohl held a hearing on this very issue and had the Government Accountability Office, GAO, research and come up with recommendations to stop retirement savings leakage. The bill we introduce today, The Savings Enhancement by Alleviating Leakage in 401(k) Pension Act also known as the SEAL Act, is based upon those initial GAO recommendations.

The SEAL Act takes the first steps in helping workers and their families to pay back loans from 401(k) accounts when a worker leaves a job. Typically, when a worker separates from an employer any outstanding 401(k) loan must be paid back immediately or suffer tax penalties. The SEAL Act would allow for a greater period of time for the loan to be paid back thereby helping families to pay back the loan and allowing the monies to be put back into their retirement savings and avoid the tax penalty.

The bill also would remove the prohibition against individuals from making contributions to their 401(k) accounts in the following 6 months after a hardship loan has been made. Situations where hardship loans are made are some of the most stressful times for individuals and their families. If they have the ability and means to continue to contribute to their 401(k) accounts then they should be provided that option. The bill gives them the option to continue to save for retirement even in dire circumstances.

Finally, the bill would provide structural changes to 401(k) plans to help businesses keep down administrative costs and extra fees. Currently, the Internal Revenue Code permits businesses to structure retirement plans with an unlimited amount of loans per individual but an individual cannot take more than 50 percent of their retirement account balances in loans up to $50,000 for all outstanding loans. The Federal Government's Thrift Savings Plan has a limit of two outstanding loans, one personal loan and one loan for the purchase of a house, at any time. We consulted with retirement experts, mutual funds and retirement service providers and virtually all agreed that the optimal number of loans agreed upon was 3 outstanding loans at any time. Some believed that we should match the Thrift Savings Plan, however, we believe that businesses need to reduce administrative costs but they should be able to provide flexibility to their workers. The bill also would restrict the use of credit and/or debit card loans on 401(k) accounts. Again, these types of loans pull money out in ``reserve'' so that individuals can tap the reserve at any time. However, the extra administrative costs and fees are burdensome to businesses and to their workers.

Overall, the SEAL bill is the first step in helping to provide flexibility for individuals and plan structure to help keep retirement monies in retirement savings accounts. I look forward to working with Chairman Kohl in moving this important piece of retirement savings legislation. I also look forward to working with my colleagues to improve and add other items to help reduce leakage in 401(k) retirement savings and to help our Nation's workers and their families have their money there for them at retirement. Each step that we take to stop leakage will mean that individuals will be more financial secure in retirement.

Mr. President, in February the Committee on Health, Education, Labor, and Pensions held a hearing on the success of the automatic enrollment provisions of the Pension Protection Act of 2006 which helped millions of workers and their families access to a 401(k) retirement savings accounts. Because of the Pension Protection Act, we greatly expanded retirement savings and individuals ability to put money away for their golden years.

Just last week, Fidelity Investments released a report that employer- sponsored retirement plans with an automatic enrollment feature have an overall participation rate of 82 percent compared with only 56 percent without automatic enrollment. The Fidelity report also indicated that average account balances for 401(k) and similar retirement accounts have reached an all-time high. This is some good news to show that workers and their families retirement accounts are coming back from the economic distress of just a few years ago.

While our Nation's 401(k) retirement system is providing greater opportunities for individuals to save, there is still room for improvement. Recent studies have shown that money saved in 401(k) accounts sometimes ``leaks'' out of the system and is never put back. AonHewitt released a report this week showing that unpaid loans, withdrawals and cashouts of 401(k) monies, otherwise known as ``leakage,'' can have a substantial effect on how much money ultimately will be there for retirement. According to the AonHewitt report, an individual who ceases to make loan repayments during the loan term is expected to erode future retirement income by 10 to 13 percent. If the individual has two loans and payments are not made then the reduction in retirement savings nearly doubles. In the event of a complete default of the loan, then the monies are permanently gone from the retirement system.

Today, I join the Chairman of the Senate Aging Committee, Senator Kohl, in taking the first step in helping to stop leakage in the retirement system. Chairman Kohl held a hearing on this very issue and had the Government Accountability Office, GAO, research and come up with recommendations to stop retirement savings leakage. The bill we introduce today, The Savings Enhancement by Alleviating Leakage in 401(k) Pension Act also known as the SEAL Act, is based upon those initial GAO recommendations.

The SEAL Act takes the first steps in helping workers and their families to pay back loans from 401(k) accounts when a worker leaves a job. Typically, when a worker separates from an employer any outstanding 401(k) loan must be paid back immediately or suffer tax penalties. The SEAL Act would allow for a greater period of time for the loan to be paid back thereby helping families to pay back the loan and allowing the monies to be put back into their retirement savings and avoid the tax penalty.

The bill also would remove the prohibition against individuals from making contributions to their 401(k) accounts in the following 6 months after a hardship loan has been made. Situations where hardship loans are made are some of the most stressful times for individuals and their families. If they have the ability and means to continue to contribute to their 401(k) accounts then they should be provided that option. The bill gives them the option to continue to save for retirement even in dire circumstances.

Finally, the bill would provide structural changes to 401(k) plans to help businesses keep down administrative costs and extra fees. Currently, the Internal Revenue Code permits businesses to structure retirement plans with an unlimited amount of loans per individual but an individual cannot take more than 50 percent of their retirement account balances in loans up to $50,000 for all outstanding loans. The Federal Government's Thrift Savings Plan has a limit of two outstanding loans, one personal loan and one loan for the purchase of a house, at any time. We consulted with retirement experts, mutual funds and retirement service providers and virtually all agreed that the optimal number of loans agreed upon was 3 outstanding loans at any time. Some believed that we should match the Thrift Savings Plan, however, we believe that businesses need to reduce administrative costs but they should be able to provide flexibility to their workers. The bill also would restrict the use of credit and/or debit card loans on 401(k) accounts. Again, these types of loans pull money out in ``reserve'' so that individuals can tap the reserve at any time. However, the extra administrative costs and fees are burdensome to businesses and to their workers.

Overall, the SEAL bill is the first step in helping to provide flexibility for individuals and plan structure to help keep retirement monies in retirement savings accounts. I look forward to working with Chairman Kohl in moving this important piece of retirement savings legislation. I also look forward to working with my colleagues to improve and add other items to help reduce leakage in 401(k) retirement savings and to help our Nation's workers and their families have their money there for them at retirement. Each step that we take to stop leakage will mean that individuals will be more financial secure in retirement.

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.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.

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.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.

Mr. President, I ask unanimous consent that the text of the bill be printed in the Record.