Senate Bill Would Restrict Access to 401(k) Loans

New legislation to be introduced this week would put tighter restrictions on withdrawals from employee 401(k) plans, in an effort to stem the flow of funds out of retirement savings accounts, according to a report by Bloomberg News.

Sen. Herb Kohl (D. Wis.) plans to introduce the “SEAL 401(k) Savings Act” with Sen. Mike Enzi (R., Wyo.), which would reduce the number of loans workers are allowed to take from a 401(k) to three per participant, through employers would be permitted have the option to further limit the number of loans allowed at any given time.

“During these difficult economic times, we are increasingly seeing 401(k) funds being treated as rainy-day funds,” Senator Herb Kohl, a Wisconsin Democrat, said in a statement obtained by Bloomberg. “A 401(k) savings account should not be used as a piggy bank for revolving loans.”

Virtually all defined benefit plans such as 401(k)s offer general-purpose loans with a repayment period of up to five years, a study by benefits consultant Aon Hewitt, a unit of Chicago-based AON Corp., found. (Some plans allow loan terms of up to 10 to 30 years.) At the end of 2010, more than a quarter (28%) of plan participants had an outstanding loan, with an average outstanding loan balance was $7,860, according to the study, which tapped a database of about 2 million employees in 110 plans.

The bill would also provide more time to repay loans after a worker has lost a job, let workers contribute to their 401(k)s after taking hardship withdrawals, and ban 401(k) debit cards, Joe Bonfiglio, a spokesman for the Senate Special Committee on Aging, told Bloomberg.

To learn more about the proposed legislation, read the Bloomberg article here.