Millions of Americans work for companies that sponsor a 401(k) or similar tax-deferred retirement plan, and the amount of money that these individuals have been able to set aside using such savings vehicles has been substantial. For example, an updated report from the Investment Company Institute (ICI) calculated that $7.7 trillion were held in 401(k)s and other defined contribution (DC) plans at the end of the third quarter of 2017 (most current data available). That was a significant rebound from just $3.5 trillion in 2008 during the heart of the “Great Recession,” accounted for more than a quarter (28 percent) of all U.S. retirement assets at the end of Q3, and equated to almost one-tenth of Americans’ aggregate financial assets.
The ICI report also revealed that the vast majority of DC participants in America continued to save using their workplace-provided retirement plans during the first nine months of 2017. Specifically, only 2.4 percent of participants had stopped making contributions to their DC plans at the end of Q3, in line with the average for the current business cycle and well below what was seen during the recession. Further, hardship withdrawals were taken by just 1.3 percent of DC plan participants during the first three quarters of 2017, nearly matching the record low, and only 2.8 percent of participants made any sort of withdrawal. As for borrowing activity, just 16.7 percent of all 401(k) plan participants had a related loan outstanding at the end of the Q3. That is up slightly from the start of the year but in line with the recent seasonal pattern and still one of the best readings on record.
401(k) borrowing remains relatively low as a tightening labor market and an uptick in wage growth have provided Americans with more disposable income, and in turn lessened the need to tap into retirement assets early. This is encouraging since it is generally a good idea to never touch your long-term savings until you are truly ready to retire. Moreover, a well-known study by the Pension Research Council at the Wharton School found that when it comes to actually paying back the borrowed funds, one in ten 401(k) loans are never repaid in full. Job changes appear to be the most common reason for this because a staggering 86 percent of examined borrowers switching to a new employer were found to have defaulted on an outstanding 401(k) loan. Unsurprisingly, default rates were even higher for participants with multiple 401(k) loans.
Sources: Investment Company Institute, Pension Research CouncilPost author: Charles Couch