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Data & Research August 1, 2013
Loan Takers Save Less
An analysis from New York Life Retirement Plan Services shows 401(k) plan participants who take out loans have lower savings rates.
Reported by Kevin McGuinness
New York Life’s first annual “State of the Retirement Industry” report says participants who take loans are more likely to save at a lower contribution rate than their counterparts, and are not likely to repay the loan when leaving their employer. Research across New York Life’s defined contribution platform found the average contribution rate for a participant who takes out a loan from their 401(k) plan is 5.63%, compared with 7.23% for participants without loans.
Additionally, the analysis found more than two-thirds of participants with an outstanding loan balance who leave their employers will take a cash distribution from their retirement plan rather than paying back the loan. Preventing this plan “leakage” is very important in helping workers successfully save for retirement, the report notes.
“Americans are not saving enough for retirement and compounding this problem is the fact that loans can drain precious retirement dollars,” said Rachel Rice, managing director of marketing and product development at New York Life Retirement Plan Services. “As an industry, we need to reverse the ATM mentality that has developed around 401(k) savings by encouraging sponsors to rethink loans from a plan design perspective, and enabling participants to differentiate between everyday, emergency and retirement savings.”
Loans against 401(k) balances have often been offered as an attempt to increase plan participation and allow participants access to their money during a financial hardship, but New York Life’s research indicates average participation rates for plans without loans are only 9.6% lower than those plans with loans (67% vs. 76%). While eliminating loans entirely from 401(k) plans may not be practical, New York Life asserts the number and size of loans available to participants should be limited in scope.
The report also found that average American worker in a New York Life 401(k) plan is 43 years old, earns $68,700 annually, contributes 6.25% of salary into the 401(k) and has an account balance of $55,270.