By Nick Thornton
The temptation to tap 401(k) assets
in a cash crunch can be as hard to resist as it is ultimately regrettable to those who succumb to the temptation.
Nearly one-third of Americans have borrowed against their retirement plan, according to a study by TIAA-CREF. Almost half of those that did say they regret doing so.
Among those who have taken out loans, 43 percent have taken out two or more.
Paying off debt, financing emergencies and buying or renovating a home were the top three reasons workers drew from their retirement savings
It’s not just the number of workers who are borrowing from their plans that is concerning. Almost 10 percent reported borrowing more than half of their savings; 47 percent borrowed at least one-fifth of their plan’s savings.
“Too many people have struggled since the 2008 financial crisis and have looked at loans from their retirement plans as a way to ease financial stress,” said Teresa Hassara, vice president of TIAA-CREF’s Institutional Business.
The risks to accessing retirement savings are all too real, given the systemic underfunding in self-directed plans. Compounding the problem is the fact that most who do borrow from their plans contribute less to their retirement as they pay back the loan. More than half (57 percent) of respondents decreased their contribution rate during the payback period.
“Loans can undermine retirement savings and cause investors
to miss out on earnings from rising markets,” said Hassara. “Working with a financial advisor can help people make the best decision for their life stage and retirement goals.”
The survey suggests that plan sponsors can play a larger role in discouraging loans against retirement savings. Limiting participants to three loans over the course of their plan’s life, and only allowing loans from participant contributions, and not the employer match portion of the assets, could help establish parameters in a participant’s mindset.
See also: Premature plan withdrawals total up to 45 percent
Limiting loans can also reduce fee expenses, benefiting sponsors and enrollees.
A previous TIAA-CREFF survey showed that 81 percent of Americans trust the financial information offered by their employer, which was a substantially greater percentage than those who trusted the advice offered by a traditional financial institution or advisor (69 percent).
That means sponsors may have the ability to offer the education that can deter withdrawals.
“If loans are necessary to cover an emergency or the loss of a job, people should seek advice to minimize the loan’s long-term impact on their retirement savings,” added Hassara.
“It’s a good example of why plan sponsors should make financial education and advice a core component of their plans.”
Originally published on BenefitsPro.com