More 401(k) Loan Taking by 'Sandwiched' Employees

Average loan balances increased among workers over age 50

By Stephen Miller, CEBS Apr 22, 2013

There was a 28 percent increase in the number of participants taking loans from their 401(k) plan in the fourth quarter of 2012, and the average new loan balances rose to $7,126, up from $6,662 for loans taken in the fourth quarter of 2011 (a 7 percent increase), according to an analysis of nearly 2 million participants enrolled in Wells Fargo-administered defined contribution plans, the bank reported.

Of participants who took out loans, the greatest percentage were in their 50s (34.2 percent), followed by those in their 60s (28.9 percent) and those in their 40s (27.3 percent). The increase among participants in their 50s was nearly double the increase among those under 30.

“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.”

Nearly one-fifth (19.2 percent) of those 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 the increase in loan activity is concerning, we know that loans are not the biggest driver of leakage from retirement savings,” Nordquist said. “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.”

Despite the jump in loan taking, the bank found that participants are contributing more of their income to their 401(k). In the fourth quarter there was a slight decrease (-1.8 percent) in participants deferring 3 percent or less and an increase in those contributing 10 percent or more (+1.3 percent).

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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