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Workers Swear Off 401(k) Loans

Employer education about downside of borrowing from retirement accounts may be working. The percentage of workers with outstanding 401(k) loans increased less than 1 percent so far this year.

August 21, 2008
Related Topics: Retirement/Pensions, Workforce Planning, Latest News
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You’ve heard this story all year long: Scores of workers are struggling to meet payments on mortgages or maxed-out credit cards—or both—and are now tapping into their 401(k) savings as a last resort.

But it turns out that this couldn’t be further from the truth.

Credit-crunched consumers aren’t raiding their employer-sponsored nest eggs any more than usual, with the percentage of workers with outstanding 401(k) loans increasing by less than 1 percent so far this year, according to data provided by Hewitt Associates to Financial Week, a sister publication of Workforce Management. Specifically, the benefits consulting firm estimates that about 22 percent of workers are now borrowing from their 401(k) plans.

“It could be that some of the early attention given to the downsides of borrowing from your 401(k) has scared workers from actually doing it,” said Alison Borland, head of the defined-contribution practice at Hewitt.

Borland said that many employers have focused on educating their workers about how 401(k) loans could potentially erode a considerable part of their savings.

Such education initiatives appear to be working, as other studies have also found that 401(k) loans are barely on the rise—if they’re even increasing at all. Fidelity, for example, found that 19.2 percent of workers had outstanding 401(k) loans at the end of June, down from 19.4 percent in June 2007 and 19.9 percent in 2006.

While these numbers could be trending downward because workers are paying off their 401(k) loans, Fidelity actually found that the number of workers now initiating loans from their 401(k) plans has declined as well: 2.8 percent of workers took 401(k) loans in the second quarter, compared with 3.1 percent of participants who did so during the same period last year.

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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