Legislation designed to slow 401(k) fund leakage

There's growing concern that too many workers are tapping their 401(k) accounts by borrowing, making withdrawals or cashing out altogether. As a result, some industry leaders are calling for changes.

There is debate among 401(k) providers, however, whether limiting borrowing would reduce participation in retirement saving plans. That's because many account holders feel reassured about making contributions because they know they can access the money in case of an emergency.

Last month, a bill was introduced in the U.S. Senate that would make a few changes.

Introduced by Sen. Herb Kohl, a Wisconsin Democrat and Sen. Mike Enzi, a Wyoming Republican, the bill's changes would:

Ÿ Allow workers more time to repay loans if they lose their job. Currently repayment must occur within 60 or 90 days, depending on the plan. The new law would extend that repayment period until tax filing deadline — April 15 of the next year. Workers would deposit the money into a qualified individual retirement account. This is designed to lower defaults among those who lost a job while owing their 401(k).

Ÿ Allow a worker taking a hardship withdrawal to continue making contributions. Currently, a worker taking a withdrawal cannot continue to contribute for at least six months. If the worker can resolve the financial emergency more quickly, preventing ongoing contributions only prevents the account from growing as a result of the worker's contribution and the employer match.

Ÿ Restrict the number of loans a worker can have outstanding at one time to three.

Ÿ Ban the use of debit cards tied to a 401(k) account. Although it's not a common practice, some plans have allowed workers to tap into funds by using a debit card.

The bill was referred to the Senate Finance Committee on May 18. No date has yet been set for discussion, said Joe Bonfiglio, a spokesman for the Senate Special Committee on Aging, which Kohl chairs.