A new study from the Investment Company Institute (ICI) highlighted some recent trends in defined contribution (DC) plan participation. For example, $6.8 trillion were held in 401(k)s and other DC plans at the end of 2015 (most current data available), up from just $3.5 trillion in 2008 and accounting for more than a quarter (28 percent) of all U.S. retirement assets. Withdrawal and contribution data signaled that the vast majority of DC participants in American continued to save with their workplace-provided retirement plans last year. Specifically, only 2.6 percent of participants stopped making contributions to their 401(k)s or other DC plans in 2015, one of the best readings of the recovery. Further, hardship withdrawals were taken by just 1.6 percent of DC plan participants last year, and only 3.4 percent of participants took any sort of withdrawal in 2015. Both of those figures are improvements from the prior year.
As for borrowing activity, 17.4 percent of all 401(k) plan participants had a related loan outstanding at the end of 2015, the best reading since 2009 but still elevated compared to pre-recession levels. While having the ability to access your 401(k) assets early can definitely be useful in the event of an emergency, e.g. an unexpected and significant medical expense, it is generally a good idea to never touch these savings until you are truly ready to retire. Moreover, a study from the Pension Research Council at the Wharton School found that when it comes to actually paying back the borrowed funds, 10 percent of 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, EBRI, NBERPost author: Charles Couch