Although many 401(k) plans offer participants loans, a statistic that plan sponsors don’t want to see is the number and size of those loans increasing. But some of them are seeing just that, according to Wells Fargo.
A recent study by the banking company of fourth-quarter 2012 activity at the defined contribution plans it administers found an increasing number of participants taking loans out of their retirement savings, with those in their 50s leading the increase. Twenty-eight percent more participants in Wells Fargo 401(k) plans had new loan balances compared with the same period in 2011, and balances rose 7 percent to an average of $7,126 from $6,662 that quarter the year before.
The success of a 401(k) plan depends on employee participation, particularly that of non-highly compensated employees. If employees are told that their funds will be tied up until termination of employment, they may be less likely to participate than if they can have access to the funds during employment. A plan loan program may provide that type of encouragement and at the same time avoid the disadvantages of in-service withdrawals such as adverse tax consequences and depletion of retirement savings.
Plan loans that participants can repay offer the employee a chance to use his or her money without terminating employment or permanently depleting retirement savings. (See ¶460-469 in the Guide to Assigning and Loaning Benefit Plan Money for more about starting and administering a 401(k) plan loan program.)
Most Borrowers in Their 50s
Among the 1.9 million eligible participants in Wells Fargo-administered DC plans, the largest number — 34.2 percent — of those taking out new loans in the fourth quarter were workers in their 50s, followed by 28.9 percent in their 60s. Participants in their 40s comprised 27.3 percent of workers with new loan balances, Wells Fargo said in a press release April 11.
“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,” Laurie Nordquist, director of Wells Fargo Retirement, said in the press release. “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.”
Nordquist expressed more concern about the so-called leakage occurring when employees cash out their 401(k) savings when leaving an employer than she did about the loans. “Those dollars are often spent, whereas with loans funds are often repaid and stay in the retirement nest egg,” she said.
Finding out More
To read the complete story on Thompson’s HR Compliance Expert, click here.
Use ¶460-469 in the Guide to Assigning and Loaning Benefit Plan Money for more information on establishing and administering a 401(k) plan loan program.