Savings Booster: Making it Simpler to Repay Your 401(k) Loan

The SEAL Act has undergone a facelift in name only. Maybe now lawmakers will do the right thing and cut strapped borrowers a break.

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Maybe it was the tortured acronym that sank the SEAL Act two years ago. So lawmakers are back with another try. The letters and measures remain the same. But this version of SEAL stands for words that are at least slightly more comprehensible.

And by the way it’s a smart proposal that would help protect retirement security for millions of Americans, which is what makes this name game worth writing about.

Gone is the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act sponsored by former Democratic U.S. Senator Herb Kohl of Wisconsin and Republican U.S. Senator Mike Enzi of Wyoming. Say hello to the Shrinking Emergency Account Losses Act, sponsored by Enzi and Democratic U.S. Senator Bill Nelson of Florida.

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This new SEAL Act was recently reintroduced in Congress. Let’s hope lawmakers find it more understandable because its measures would address one of the huge failings of the 401(k) retirement savings system: the billions of dollars that leak out of retirement accounts each year through hardship withdrawals and loans that never get repaid.

The persistent problem of savers pulling money from their 401(k) plan has grown even worse since the financial crisis. One in four workers with a 401(k) or other defined contribution plan tap their account for current expenses. This “leakage” reaches $70 billion a year, equal to nearly a quarter of all contributions, one study shows.

The SEAL Act would ensure that at least some of this lost savings gets restored. Under the proposed law, anyone leaving their employer while a 401(k) loan is outstanding would have until they file their taxes for that year to repay the loan. Currently, these loans must be repaid in 60 days or they are treated as a distribution subject to income taxes and early withdrawal penalties.

The SEAL Act also would allow workers to keep making contributions—and collecting the company match—immediately after taking a 401(k) loan. Currently, contributions must be suspended for six months after a loan. The act also would limit to three the number of loans a worker can take from a 401(k) plan and outlaw debit cards linked to 401(k) assets.

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These steps wouldn’t stop money from leaking out of retirement plans, nor should they. People need to know they can get at their savings in an emergency or they won’t contribute. But the 401(k) has emerged as our single biggest retirement asset. More than 75% of full-time employees have access to a 401(k) or similar plan, and these plans now hold 66% of families’ assets, reports the Employee Benefit Research Institute.

People who need to get at their money should be able. We should also consider requiring loan insurance that would repay the 401(k) loans of any workers who lose their job involuntarily. Such job loss leads to retirement savings leakage of up to $37 billion annually.

Your 401(k) plan was never designed to be a piggy bank. So some hurdles are a good thing. Meanwhile, allowing a displaced worker up to a year to repay a 401(k) loan and permitting borrowers to keep contributing to get the company match can help beef up retirement security. The SEAL Act makes sense—no matter what the letters stand for.