Premature plan withdrawals total up to 45 percentNews added by Benefits Pro on February 19, 2014
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By Paula Aven Gladych

Participants in tax-deferred retirement accounts, including 401(k) and IRA plans, withdraw 30 to 45 percent of their annual total contributions in premature withdrawals, according to the Pension Research Council.

Out of those, the PRC estimates there are $6 billion in defaults on national 401(k) loans annually, generating just over $1 billion in federal tax revenue per year.

Most active DC participants in the U.S. are allowed to borrow from their retirement accounts and about one-fifth take advantage or four in 10 over a five-year period, the report’s authors found.

Participants are required to repay these loans on a set schedule and about 90 percent do so with no problem. The Pension Research Council estimates that one in 10 loans is not repaid, in large part because these individuals leave their current employer and don’t bother repaying what they owe.

Employer loan policy has a major effect on 401(k) borrowing, the report found. If a plan sponsor allows multiple loans rather than only one, each individual loan is smaller. That said, the ability to take out multiple loans doubles the chances people will borrow from their accounts and the aggregate amount borrowed rises 16 percent.

People between the ages of 35 and 45 are the most likely to borrow from their retirement accounts and those with lower income and lower non-retirement wealth are also most likely to borrow from their 401(k) plans.

Eighty-six percent of the workers terminating employment with an outstanding 401(k) loan do default, the study found. Low-liquidity households are more likely to default, although the effects are economically small compared to the mean default rate.

Originally published on BenefitsPro.com
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