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, a new study by the Investment Company Institute (ICI) calculated that $8.2 trillion were held in 401(k)s and other defined contribution (DC) plans at the end of the first quarter of 2019 (most current data available).
That represents a significant rebound from just $3.6 trillion in 2008 during the heart of the “Great Recession,” accounts for more than a quarter (28 percent) of all U.S. retirement assets at the end of Q1, and equates 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 three months of 2019. Specifically, only 0.9 percent of participants stopped making contributions to their DC plans in Q1, a new all-time low and roughly a third of what was seen during the last economic downturn.
Hardship withdrawals were taken by just 0.5 percent of DC plan participants in Q1, in line with the cycle average, and only 1.4 percent made any sort of withdrawal despite upward pressure from retiring Baby Boomers. As for borrowing activity, just 15.9 percent of 401(k) participants had a related loan outstanding at the end of the first quarter of 2019, the best reading since 2008. A seasonal pattern suggests borrowing may pick up later this year but overall should remain relatively low as the tightening labor market and uptick in wage growth have provided Americans with more disposable income, and in turn lessened the need to tap into these assets early.
That is encouraging since it is generally a good idea to never touch your long-term savings until you are truly ready to retire. We provided some evidence of this in a post last month, and earlier research by the Pension Research Council similarly 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 Council