What 401(k) withdrawals say about client ‘financial infidelity’

Some 401(k) withdrawals without a spouse’s knowledge or permission cause “hardships” that beg the question of whether a partner’s consent should be required for them, a new study said.

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Aligning the standards for 401(k) withdrawals with existing spousal consent requirements for transferring assets out of pensions or the federal Thrift Savings Plan could solve the problem. But it could also boost costs and burdens or, worse, endanger domestic abuse victims, according to a study released last month by the U.S. Government Accountability Office, an independent agency that reports to Congress. 

The research added to a growing policy discussion around possible new spousal rules for 401(k) withdrawals and other literature around forms of “financial infidelity” in relationships.

While the extent of such withdrawals is unknown, the study said that expert stakeholders have seen them reach into the hundreds of thousands of dollars in some cases, lead to divorces or complications in post-separation negotiations and leave women in particular at risk. 

In general, financial infidelity happens when one partner is “keeping money secrets from your spouse or not being fully transparent with your spouse,” according to Preston Cherry, the founder of Houston-based registered investment advisory firm Concurrent Wealth Management. A frequent speaker on how money issues affect couples, Cherry said that, historically, financial infidelity has related to men restricting information about a household’s wealth from their wives, although those communication problems could occur on either side of a relationship and stem from issues dating as far back as either partner’s childhood, values or family backgrounds.

“Financial infidelity doesn’t always just happen because of the integrity of the person right off the bat,” Cherry said. “You have to have the talk, and, if you don’t, these are some of the main contributors to divorce rates.”

And those 401(k) plans and any differences in the visibility for either spouse do come up in divorce proceedings, according to Cherry and financial behaviorist Jacquette Timmons, who coaches advisors, wealth management firms and investors and wrote a book called, “Financial Intimacy: How to Create a Healthy Relationship with Your Money and Your Mate.” But Timmons has seen examples of 401(k) infidelity among newlyweds, too, she said. She recalled the case of a woman who was shocked to discover that the new husband who had been “wining and dining her” had removed assets from his 401(k) account. 

“There is a lack of communication and a lack of transparency and sharing, but I’m also curious as to how you hide it, because you have to pay taxes at some point,” Timmons said. “You are presenting this lifestyle that is not the reality of the condition of your finances, so that’s a form of infidelity.”

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The key takeaways

Researchers at the GAO under Tranchau “Kris” Nguyen, the agency’s director of education, workforce and income security, began examining that type of infidelity at the request of bipartisan members of Congress who had “expressed concern about the potential effects of participants removing funds from defined contribution plans without spousal consent, as well as the potential burdens of introducing additional spousal protections to defined contribution plans,” she wrote in the public letter in the introduction to the report. Among other sources, the GAO interviewed representatives for industry stakeholders, as well as “three current or former spouses with relevant experience,” Nguyen noted.

Even though most defined-contribution retirement plans oblige married partners who are listed as beneficiaries to authorize any change in beneficiary, the vast majority of 401(k) plans “do not require spousal consent for participants to actively remove funds through withdrawals, loans or distributions,” the study said. In 2021, 11% of married couples of any age with at least one defined-contribution account removed assets from them, while 22% that had either a 401(k)-type plan or an individual retirement account took a withdrawal. 

But whatever smaller portion of that share of couples whose withdrawal constituted this form of financial infidelity may have carried outsize impact to one spouse: two stakeholders discussed transactions of a half a million dollars or more and one mentioned a client who “experienced homelessness after her husband drained his 401(k) account,” the report said.

“[My husband] had taken the whole amount out of the 401(k) account without informing me or telling me anything,” one of the spouses told the GAO researchers. “I only found out because he was overspending on … things he usually did not spend money on.”

Those actions reduce wealth while extracting “an emotional toll,” and possibly displaying warning signs of financial abuse, addiction, aging or extramarital affairs, experts told the GAO. Besides affecting the crucial financial negotiations in the event of a divorce, they may help cause the couple’s underlying separation.  

“Spouses who did not know of or consent to the removal of retirement funds may feel lied to and betrayed, which can lead to personal hardship and marital discord, according to legal stakeholders, those representing retirees and spouses we interviewed,” Nguyen wrote in the report. “Stakeholders said discovering the deceit can erode trust in the marriage. For example, the three spouses we spoke with, who each had retirement funds taken, all said they felt betrayed by the participants’ removal of funds without their consent.”

Requiring that consent could put safeguards in place for divorce proceedings and cut down on that type of infidelity. However, that may impose costs on service providers that they would then pass down to sponsors and participants, ramp up the time it takes to process a transaction or even alert an abusive partner to the outgoing disbursement, the report said. But the Secure 2.0 Act and other regulations have given participants more leeway for emergency distributions in cases of domestic abuse. And alternatives to a full authorization requirement, such as a simple mandatory notification or a threshold in the amount triggering a need for spousal consent, could prove less burdensome.

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Further discussions

The GAO’s research came amid other calls for reform of spousal 401(k) rules, like a proposal that the report cited by the American Academy of Actuaries, a nonprofit, nonpartisan professional association for actuaries. Despite many changes over decades to the Employee Retirement Income Security Act of 1974, gaps “still remain” in the spousal protections for retirement plans, the group’s briefing on the proposal said. 

Along with taking other steps, the organization said policymakers should find ways to “improve spousal protections in DC plans and IRAs (including rollover IRAs), such as requiring spousal consent for any distribution/loan/rollover,” and “improve spousal rights to retirement plan information.”    

“This is a critical need given the shift to DC plans as a primary source of retirement security in the U.S.,” the briefing said. “This is particularly important for spouses seeking access to retirement plan benefits during a divorce.” 

Such policy discussions could entail many levels of government and industry, all the way down to individual couples who may feel wary of discussing the concept of financial infidelity at all. Fortunately, those latter behavioral barriers may be less insurmountable than they look, according to a study published earlier this year in the journal, “Social Psychological and Personality Science.” 

In a finding the study said carried “practical implications for both practitioners (e.g., financial advisors and marriage counselors) and couples seeking to better align their (financial) expectations with reality,” researchers from five universities said that spouses frequently underestimate “how enjoyable, informative and socially connecting these conversations will be.” Those researchers tracked the impressions and reactions of 1,900 married U.S. adults before and after they discussed a financial topic with their spouses.

“For people who feel uncomfortable or uncertain about how to start a financial conversation with their spouse, this is a reminder that these conversations are more positive than people expect, and people are more likely to end up reaching an agreement,” lead author Ximena Garcia-Rada, an assistant professor of marketing at Texas A&M University’s Mays Business School, said in a press release from the university last month. “This can be powerful in getting people to approach these conversations and derive the enjoyment and relationship benefits that we are observing in our studies.” 

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The larger underlying issue

For Cherry, the discussions about financial infidelity demonstrate the need for couples to talk about money early and often “in order to have a unified front with your finances in your household.” And that means communicating a lot about both partners’ financial goals. 

Concurrent Wealth Management

“For those who have been married a long time and need to communicate more because there’s a lack of communication, there’s a system that I call financial unity,” Cherry said. “It’s agreeing to meet, agreeing to understand each other, agreeing to affirm each other, agreeing to agree. You don’t necessarily have to agree about how you’re going to go about it. You need to agree about the household goal.”

To Timmons, the research on financial infidelity brought up cases like one spouse’s surprise that the other had sold an apartment, even as it gave her pause about the ramifications of any spousal 401(k) withdrawal consent requirement for abuse victims or policy questions like the status of an account that began 10 years prior to a marriage.

“It depends on the nature of the infidelity. It depends on the length of time that the infidelity has been occurring,” Timmons said. “The infidelity is emblematic of other issues going on in the relationship. This is just a manifestation of what those other issues are, beginning with the fact that there’s clearly a lack of communication, a lack of transparency and a lack of honesty.”