Retirement, Economy

401(k) Loan Activity Continues To Decline

11/9/16 8:00 AM

iStock_000005970521_Small.jpgA new study from the Investment Company Institute (ICI) highlighted some recent trends in defined contribution (DC) plan participation. For example, $7.0 trillion were held in 401(k)s and other DC plans at the end of the second quarter of 2016 (most current data available), a significant improvement from just $3.5 trillion in 2008 during the heart of the “Great Recession.” That total also accounted for more than a quarter (29 percent) of all U.S. retirement assets at the end Q2, and almost one-tenth of Americans’ aggregate financial assets.

Elsewhere in the report, withdrawal and contribution data signaled that the vast majority of DC participants in America continued to save with their workplace-provided retirement plans in the first half of 2016. Specifically, only 1.8 percent of participants stopped making contributions to their 401(k)s or other DC plans during the first six months of this year, well below what was seen at the end of the recession (4.6 percent). Further, hardship withdrawals were taken by just 0.8 percent of DC plan participants in H1, a record low, and only 2.1 percent of participants took any sort of withdrawal whatsoever in the first half of 2016.


As for borrowing activity, 17.1 percent of all 401(k) plan participants had a related loan outstanding at the end of the second quarter, the best Q2 reading since 2009. Loan activity in the second quarter actually rose slightly from Q1 (17.0 percent) but this is consistent with the seasonal pattern seen over the past few years where 401(k) borrowing tends to increase during Q2 and Q3. 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 well-known study from 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, EBRI, NBER

Post author: Charles Couch