401(k) accounts aren’t designed as piggy banks to be tapped for non-retirement expenses. But stuff happens.
Since the Great Recession, loans from 401(k) accounts have been rising. Some 17.6 percent of plan participants had loans outstanding last year, compared with 15.3 percent in 2008, according to the Investment Company Institute (ICI). A much smaller number of 401(k) participants (1.3 percent) took hardship withdrawals last year, according to the ICI.
The loan numbers reflect the financial pressures facing so many households. A recent survey by the Pew Charitable Trust found that 60 percent of U.S. households experienced a financial shock in the past 12 months. This was typically lost income due to unemployment, illness, injury, death or a major home or vehicle repair.
When trouble strikes, backup emergency cushions are often glaringly absent. Lower-income households (income below $25,000) had enough savings to replace only six days of household income. Even households with more than $85,000 say they can replace just 40 days of income from savings, Pew found.
Plan sponsors are not required to allow loans or hardship withdrawals, but about 90 percent do, said Lynn Pettus, national director of the employee financial services practice at Ernst & Young LLP. “Most of them think flexibility is necessary because at the end of the day employee is putting away their own money for retirement,” she said.
But employers and retirement policy experts worry about early withdrawals.
This kind of account leakage is one of the culprits behind the anemic retirement savings that so many workers must eventually confront. In addition, pre-retirement withdrawals come with plenty of downside and risk, ranging from lost investment returns to taxes and penalties.
Learn more about the ins and outs of early drawdowns from retirement accounts in my Reuters Money column this week.