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Disturbing increase in those taking loans from their 401k last quarter


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#1 Jase

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Posted 12 April 2013 - 08:54 AM

The biggest offenders being those in an age group that should be padding their accounts to carry them through the rest of their life. Who's going to support them when their money runs out? Probably you.


https://www.wellsfar...antsTakingLoans

Through an analysis of participants enrolled in Wells Fargo-administered defined contribution plans, the bank announced today that in the fourth quarter of 2012, there was a 28 percent increase in the number of people taking loans out from their 401(k) and that the average new loan balances increased to $7,126 from those taken out in the fourth quarter of 2011 - a 7% increase from $6,662.

Of the participants who took out loans, the greatest percentage were to people in their 50s (34.2%), followed by those in their 60s (28.9%) and then by those in their 40s (27.3%). The increase among participants in their 50s was nearly double the increase among those under 30. This is based on an analysis of a subset of 1.9 million eligible participants in retirement plans that Wells Fargo administers.

“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.”

In addition to the 2012 new loan activity, according to the Wells Fargo data nearly one fifth (19.2%) 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. While older participants are taking more loans out than their younger colleagues, the younger a participant is, the greater the loan tends to be as a percentage of their 401(k) account balance. For those under 30, the outstanding loan balance is 38.2% of their remaining untouched balance. For those over 60, it drops to 21.1%. However, only about 9% of all participants under 30 have an outstanding loan, compared to almost 25% of 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.”

Although loan activity is on the rise, people are contributing more of their income to their 401(k) plan. In the fourth quarter, there was a slight decrease (-1.8%) in participants deferring 3% or less and an increase in those contributing 10% or more (+1.3%).

“It is encouraging that people are saving at higher rates by putting a higher percentage of their income into their 401(k) plans,” said Nordquist. “Participating in an employer-sponsored retirement plan is a good first step, but we want to make sure that people are saving an adequate amount as well.”Additional trends include

  • Of the participants who increased their deferral rates from 3% to a range of 4-6%, significant numbers were in their 20s and 30s.
  • Of the participants who increased rates from the 4-6% range into the 7-9% range, most were in their 30s.
  • Participants over 50 increased rates from the 7-9% range to 10% or more
  • 25.2% of all 401(k) plan assets are now in managed investment options, up 4.1% from a year ago
  • Despite this progress, almost 20% of those 65 and older have their entire balance in a single investment. Over 70% of those (or 14% of all participants over 65) have all their money in fixed-income investments.



#2 pstall

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Posted 12 April 2013 - 08:58 AM

i have seen a scary trend in those on fixed incomes coming to my area for help with their mortgages. and the govt is going to cut SS and medicare and that is going to have a big ripple effect.

and these are folks who did not buy during the housing boom. just everyday people who have been in their home 15 yrs plus.

i'm telling ya it's not as robust of an economy as many believe. the sky isn't exactly falling either but the car is on a 1/4 tank.

#3 Davidson Deac II

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Posted 12 April 2013 - 09:00 AM

Loans from 401k are not so bad. I took one a few years ago. They don't actually take the money from my 401k, they use part of my 401k as collateral for the loan. And I pay the loan back with interest. So I am paying the interest to myself instead of a bank or a credit card company. Of course, there are bad things about it as well. For example, if I lose my job before its paid back, the balance is removed from my 401k. But its much better than taking money out.

My sister recently took a loan out against her 401k to buy a house that was foreclosed. She got a great deal. It was a great investment for her. So its not all bad.

#4 pstall

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Posted 12 April 2013 - 09:02 AM

true. 401k loans can be a wise move. like i mentioned in my line of work, i see far too many come to me and they have depleted their 401k/savings to simply stay in their home.

#5 Squirrel

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Posted 12 April 2013 - 11:13 PM

Did it back in 2009 to reduce credit card debt. Was paying it back then in september of 2009 my company shutdown. Taxes hurt the next year but was able to work with the IRS on a payment plan. Would do the loan again if need be but next time I wont take out more than I can pay back in 6 months.

#6 Carolina Husker

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Posted 13 April 2013 - 06:44 AM

Just took $25K out of mine to put an addition on the house. Considering the rates banks and credit unions wanted for an unsecured loan, it was a no-brainer. I'll have it paid off within the year, and I'm paying interest to myself, essentially.

#7 MadHatter

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Posted 13 April 2013 - 11:04 AM

Just took $25K out of mine to put an addition on the house. Considering the rates banks and credit unions wanted for an unsecured loan, it was a no-brainer. I'll have it paid off within the year, and I'm paying interest to myself, essentially.

That was absolutely a smart decision to make for that type of investment and your payback schedule.

However, young people who continuously dip into their 401k's over and over for trivial purchases are not doing themselves any favors.

#8 Carolina Husker

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Posted 13 April 2013 - 03:55 PM

Yeah. As Deac pointed out, the only two caveats are if I quit my job or get fired I have like 30 days or something to pay it off, and I can't take a second loan until this one is paid off. Neither should be of much concern.


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