By Paula Aven Gladych
The number of individuals taking loans from their 401(k)
plans increased dramatically at the end of 2012, but they contributed more of their income to their retirement accounts.
According to an analysis of 1.9 million participants in Wells Fargo-administered defined contribution plans, more than 34 percent of people in their 50s took money from their retirement plans in the fourth quarter of 2012. Nearly 29 percent of those in their 60s and 27.3 percent of individuals in their 40s also tapped into their retirement accounts.
The numbers reflect a 28 percent increase overall in the number of participants taking loans from their 401(k) and the average loan balance increased to $7,126, a 7 percent increase from $6,662 in the fourth quarter of 2011.
“The increased loan activity, particularly among older participants, is concerning because those are the years when workers can start to make ‘catch-up’ contributions and really need to focus on preparing for retirement,” said Laurie Nordquist, director of Wells Fargo Retirement
. “However, we know that this age is also the ‘sandwich’ generation, caught between paying for their kids’ education and supporting elderly parents, which makes saving for retirement even more challenging.”
Wells Fargo also found that 19.2 percent of people with money in a 401(k) plan had at least one outstanding loan and of the outstanding loans, the average balance was $7,764. Younger participants tend to take out larger loans than older participants. For those under age 30, the outstanding loan balance is more than 38 percent of their remaining untouched balance. For those over 60, it drops to 21 percent.
Only 9 percent of all participants under 30 have outstanding loans, compared to almost 25 percent for participants in their 40s.
“While the increase in loan activity is concerning, we know that loans are not the biggest driver of leakage from retirement savings,” said Nordquist. “In fact, employees cashing out their 401(k) when they leave an employer are a greater concern. Those dollars are often spent whereas with loans the funds are often repaid and stay in the retirement nest egg.”
In the fourth quarter, there was a slight decrease in participants deferring 3 percent or less to their 401(k) plans and an increase in those contributing 10 percent or more.
Wells Fargo also found that employees
in their 20s and 30s were most likely to increase their deferral rates from 3 percent to a range of 4 to 6 percent. Most of the folks who increased deferrals from the 4 to 6 percent range to the 7 to 9 percent range were in their 30s.
People in their 50s increased rates from the 7 to 9 percent range to 10 percent or more.
One disturbing trend was that 20 percent of individuals over the age of 65 had their entire balance in a single investment. More than 70 percent of those have all of their money in fixed-income investments.
Originally published on BenefitsPro.com