Dr. Olivia S. Mitchell is Professor of Insurance/Risk Management and Business/Public Policy, Executive Director of the Pension Research Council; and, Director of Boettner Center on Pensions and Retirement Research; all at the Wharton School of the University of Pennsylvania. Dr. Mitchell's main research and teaching areas are pensions, international private and public insurance, risk management, and public finance.

She served on the 2001 Commission to Strengthen Social Security, and she was a Public Member of the US Department of Labor's ERISA Advisory Council. She received the Fidelity Pyramid Prize for research improving lifelong financial well-being, and the Carolyn Shaw Bell Award of the Committee on the Status of Women in the Economics Profession. She was also honored with the Premio Internazionale Dell'Istituto Nazionale Delle Assicurazioni (INA) from the Accademia Nazionale dei Lincei in Rome. Her study on Social Security reform received the Paul Samuelson Award for "Outstanding Writing on Lifelong Financial Security" from TIAA-CREF.

She has spoken to many public and private groups including the World Economic Forum; the International Monetary Fund; the Investment Company Institute; the International Foundation of Employee Benefit Plans; the White House Conference on Social Security; the Q Group; and the President's Economic Forum; and she has provided testimony to committees of the US Congress, the UK Parliament, the Australian Parliament, and the Brazilian Senate.

Mitchell received her MA and PhD degrees in Economics from the University of Wisconsin-Madison, and a BA in Economics from Harvard University.


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Home PROspective Dr. Olivia S. Mitchell - Leakage

PROspective Vol II No IX October 2011

Wharton Professor Olivia Mitchell is one of the world's leading authiorities on pension plans. She is also the Executive Director of the Pension Research Council that conducts much of the research into pension plans and Social Security in this country.

Dr. Mitchell has authored or co-authored many papers on 401(k) plans. One of her chief concerns is "leakage" from 401(k)s. She helps us understand this problem and what can be done to plug the leaks.

Chuck Miller: What is "leakage"?

Olivia Mitchell: Many 401(k) retirement plans in the U.S. offer a loan feature which permits plan participants to access their pension saving prior to retirement. Close to one-fifth of plan participants have a loan outstanding against their accounts, with a mean value borrowed of about $7,200, or 16 percent of the average account balance. Such loans are defined by some as "leakage" in that they allow people to access their tax-qualified savings in advance of retirement.

In addition, most people who take a plan distribution after leaving a job tend to take a lump-sum, rather than rolling it over into an Individual Retirement Account; the spending of distributions is also known as leakage.

A Vanguard study analyzed the past five years of participant behavior before, during, and after the market collapse of 2008. According to the study: "About 90% of participants with losses over this period took a distribution from their account—such as a loan or a withdrawal." *

CM: How do loans affect participants?

OM: A plan loan is capped at half the account balance or $50,000, whichever is less, and the employee must immediately begin repaying the loan to him/herself. Failure to pay back, for instance, at job termination, results in the unpaid loan amount being subject to income tax (as well as a penalty tax if the individual is younger than age 59-1/2).

According to Employee Benefit Research Institute (EBRI) research, 21% of partcipants have plan loans with an average loan balance of 15% of total assets, or $7,346.** A Vanguard report from earlier this year indicates participants with no loans have balanaces that are, on average, 12% larger that those with loans. ***

What is worrisome is the loss of a significant portion of a participant's balance as repayment for a loan at retirement. With balances already considerably less than those without loans, most can't afford any "leakage".

CM: What about plan distributions when leaving an employer... do most roll it over to an IRA or new plan, or do they just cash out?

OM: Someone who takes a plan distribution in the form of cash prior to the age 59-1/2 will have to include the payment in reported income for the purposes of income tax, plus pay to the IRS an additional penalty of 10% of the lump sum (only the income tax applies after age 59-1/2). If the plan distribution takes the form of a rollover to an IRA, or to a new employer pension, the income and penalty tax is not charged.

The Vanguard study cited earlier shows 30% of those leaving an employer cash out their 401(k) balance.

CM: How can plan sponsors minimize leakage?

OM: Our research has shown that when employers permit multiple loans, workers are more likely to default on their loans. So one way to cut down on defaults might be to permit only one loan at a time. On the other hand, eliminating loans is not necessarily good policy, as many people can "borrow from themselves" more cheaply than adding to credit card debt. So we would not favor curtailing all loans. ****

*     Steve Utkus, Jean Young; The Great Recession and 401(k) plan participant behavior; the Vanguard Group; 2011

**    Jack VanDerhei, Sarah Holden, Luis Alonso;401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2009; Employee Benefit Research Institute; 2010

***  Steve Utkus, Jean Young; How America Saves 2011; the Vanguard Group; 2011

**** For a reader's perspective on plan loans, see PROspective, Vol II, No V, June 2011.

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