The Department of Labor should amend its Form 5500 to require plan sponsors to report qualified plan loan offsets as a line item distinct from other types of distributions, a report from the Government Accountability Office recommended.
The report, which was released Monday and written at the request of the Senate Special Committee on Aging, found that individuals in their prime working years (ages 25 to 55) removed at least $69 billion of their retirement savings early in 2013.
Withdrawals from individual retirement accounts were $39.5 billion and exceeded their IRA contributions in 2013, according to the report. Participants in employer-sponsored plans, like 401(k) plans, withdrew at least $29.2 billion early as hardship withdrawals, lump sum payments made at job separation and loan balances that borrowers did not repay. "However, the incidence and amount of certain unrepaid plan loans cannot be determined because the Form 5500 — the federal government's primary source of information on employee benefit plans — does not capture these data," the GAO said in its report.
If the Form 5550 was amended to provide additional information on loan offsets, it would provide insight into how plan loan features might affect long-term retirement savings, the GAO said.
The GAO spoke with stakeholders in the retirement community who said that the complexity of rolling a 401(k) account balance from one employer to another may encourage participants to take the relatively simpler route of rolling their balances into IRAs or cashing out altogether. "They noted that separating participants had many questions when evaluating their options and had difficulty understanding the notices provided," GAO said. "For example, participants may not fully understand how the decisions made at job separation can have a significant impact on their current tax situations and eventual retirement security."
With respect to IRAs, some retirement community stakeholders suggested raising the age at which an additional 10% early distribution tax applies — to 62 from 59 1/2 — to align it with the earliest age of eligibility to claim Social Security and encourage individuals to consider a more comprehensive retirement distribution strategy. But other stakeholders cautioned that it could have drawbacks for employees in certain situations, like individuals who lose jobs late in their careers who could then face additional tax consequences for accessing funds in IRAs before reaching 62.