Participants in 401(k)s and other defined contribution (DC) plans continued to amass significant wealth in the first half of 2017, according to an updated report from the Investment Company Institute (ICI). Specifically, $7.4 trillion were held in DC plans at the end of June (most current data available). That represented more than a quarter (28 percent) of all U.S. retirement assets in Q2, and equated to almost one-tenth of Americans’ aggregate financial assets. More importantly, 2017’s mid-year total was a record high for defined contribution assets, which highlights the significant rebound from $3.5 trillion in 2008 that consistent plan participants have been able to enjoy.
The ICI report also revealed that only 1.6 percent of participants stopped making contributions to their 401(k)s and other DC plans during the first half of 2017, down from 1.9 percent in 2016 and the best H1 reading since 2013. Further, hardship withdrawals were taken by just 0.9 percent of DC plan participants in the first half of this year, matching the record low. As for borrowing activity, only 16.7 percent of all 401(k) plan participants had a related loan outstanding at the end of the second quarter of 2017. That is a slight uptick from Q1 but likely due to seasonality and still the 2nd-best reading since 2009. Moreover, loan activity has been on a general downtrend since peaking in 2011. That could be related to the tightening labor market and slight uptick in wage growth that have together provided Americans with more disposable income and therefore less need to tap into retirement assets early.
Regardless, it is encouraging that 401(k) borrowing has declined because even though this plan feature provides participants with added financial flexibility, it is generally a good idea to never touch such savings until one is actually ready to retire. For example, 401(k) borrowing will lower the total funds that can be invested in the stock market and can even lead to serial, non-emergency borrowing. For the latter, these individuals can often find it difficult to get their savings back on track, and few will shop around for more favorable loan options. What is worse is that people borrowing from their 401(k) plan will often decrease their overall savings rate immediately after taking out a loan, and many of these individuals will continue to save at that reduced rate for an extended period of time.
Sources: Investment Company Institute, Employee Benefit Research InstitutePost author: Charles Couch