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More Employees Borrowing Against 401(k) Plans

March 20, 2008
Related Topics: Retirement/Pensions, Benefit Design and Communication, Policies and Procedures, Latest News
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Retirement plan participants are taking out loans on their investments at an accelerated rate jeopardizing their future assets, a leading Boston College researcher says.

The percentage of participants in 401(k) programs who have taken a loan from their investments rose from 9 percent in 2005 to 18 percent in 2007, said Alicia Munnell, director of the Boston College Center for Retirement Research.

“I think you can also expect to see more withdrawals,” Munnell said.

Employer-sponsored plans are able to encourage more people to save. “But less than 50 percent of the workforce, ages 25-64, has any kind of defined benefit or defined contribution plan,” Munnell said.

With the trend toward defined contribution plans, the decision-making has shifted from the employer to the individual.

Of those who are eligible to participate in a defined contribution plan, 89 percent do not contribute the maximum, 20 percent to 25 percent do not contribute at all and 45 percent do not roll the investment over when they change jobs, she said.

“Employers must make 401(k) plans more effective through automation,” Munnell said.

Only 49 percent of employees participate in 401 (k) plans without automatic enrollment compared to 86 percent of those who are enrolled automatically.

Participants also tend not to increase the amount of their default contributions.

A full 61 percent do not increase the amount over time, she said.

Government can help 401(k) plans, she said, by adding an annuity default and inflation-indexed products.

“And we need another tier of the retirement system,” said Munnell.

“One third of all households have no other source of income but Social Security. I don’t have a particular proposal, but it could be a funded tier, managed in the private sector with all of the good aspects of a defined benefit plan.”

Filed by Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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