Sometimes Congress means well, but only manages to make matters worse. A few politicians will hear of a problem and swiftly respond with new legislation that may help in some ways, but causes harm in others. This is the case with a new bill, a portion of which seeks to limit Americans' ability to tap into their 401(k) plans prematurely.
Not all provisions of this bill are bad. For example, one part of the bill seeks to allow 401(k) savers to make elective contributions in the months that follow a hardship withdrawal (currently, there's a six-month blackout period), which is probably fine. But here's the part that makes no sense: the bill would limit the number of outstanding 401(k) loans to three.
The bill was introduced on Wednesday by Senators Herb Kohl (D-WI) and Mike Enzi (R-WY). It's in response to a study that says about 28% of 401(k) participants have an outstanding loan against their account. The proposal intends to prevent "leakage," which occurs when people rely on their 401(k) before retirement and do not have enough money left over when they do retire to provide the amount desired. The proposal is said to also cut administrative costs.
Children Don't Have 401(k)s
For starters, children don't have 401(k)s: adults do. So why are they being treated like children? If it's their money, shouldn't they have ultimate discretion how and when they use it? Even though this money is intended for retirement saving, it is still an individual's savings, not the government's savings. These loans are ultimately paid back or treated as an early withdrawal that faces the usual penalty. So why should savers be forbidden to tap in early several times, if necessary? Although employers can have a say on how many loans they allow against their plans, the government should not.