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SEAL Act aims to restore funds leaking from 401(k) accounts

May 25, 2011

| Money Rates Columnist

A new bill would limit the number of loans workers can take from their 401(k) savings accounts to three but would make it easier for them to repay the loans if they were to lose their jobs.

The bill from Senators Herb Kohl, a Democrat from Wisconsin, and Mike Enzi, a Republican from Wyoming, aims to reverse the recent trend of 401(k) loans going up while the amount of money being saved for retirement is going down in the U.S.

The bill would limit the number of loans a person can take to three at a time. It would also ban things that turn a 401(k) account into a checking account like allowing debit cards to be linked to the 401(k) accounts. During the recession, many savers had to empty their money market accounts and savings accounts and dig into their retirement savings for transfers into the checking account in order to make ends meet. These 401(k) loans are particularly attractive to some borrowers because although they have to pay them back with interest, the interest they pay goes to themselves and not to a bank.

Taking out a loan on your future

A 2011 study by Aon Hewitt, a worldwide retirement, health care, and business consultant, found that nearly 70 percent of those with 401(k) retirement savings accounts have had one loan outstanding against their account, while nearly 30 percent have two loans outstanding. Only 2.5 percent had more than two loans simultaneously.

The Kohl-Enzi bill, titled the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011, or SEAL Act, would make it easier for people to repay outstanding loans if they lose their jobs--and access to their employer-sponsored 401(k)--before paying off the loan.

Currently, employees are required to repay the balance within 60 days of losing their job. Any unpaid amount is subject to tax and early withdrawal penalties.

Kohl and Enzi, however, would give employees until their tax deadline to contribute the balance to an IRA and avoid the tax penalty. The Aon Hewitt study found that nearly 70 percent of those who lose their jobs with an outstanding balance default on the loan and wind up paying penalties. Only 3 percent of those who remain employed default.

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