401(k) Loans Drain Retirement Dollars

Investors in 401(k) plans who take loans from their accounts are more likely to save at a lower contribution rate than their counterparts, and are not likely to repay the loan when leaving their employers, according to New York Life Retirement Plan Services’ first annual "State of the Retirement Industry" report.

When it researched its defined contribution platform, New York Life found that the average contribution rate for a participant who takes loans from a 401(k) is 5.63 percent, while the rate is 7.23 percent for participants without loans. The study also found that more than two-thirds of participants with outstanding loan balances on their 401(k)s will cash out of their plans if they leave their employers rather than paying back the loans.

“Americans are not saving enough for retirement, and compounding this problem is the fact that loans can drain precious retirement dollars,” said Rachel Rice, the managing director of marketing and product development at New York Life Retirement Plan Services. “As an industry, we need to reverse the ATM mentality that has developed around 401(k) savings by encouraging sponsors to rethink loans from a plan design perspective, and enabling participants to differentiate between everyday, emergency and retirement savings.”

Loans against 401(k) balances have often been offered as an attempt to increase plan participation and allow participants access to their money in times of financial hardship.

Source:  Financial Advisor magazine

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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