401(k) Loans and Hardship Withdrawals on the Rise

By Stephen Miller Aug 23, 2010

A struggling economy led to an increase in employees initiating loans or making hardship withdrawals from their 401(k) retirement savings accounts in 2010, according to research by Fidelity Investments.

More Loans Taken

Looking at loans taken by participants in the 401(k) plans it administers, Fidelity found that through the second quarter of 2010:

• Loans initiated over the 12 months ending June 30, 2010, grew to 11 percent of total active participants, up from about 9 percent during the preceding year.

• The portion of participants with loans outstanding increased 2 full percentage points, to 22 percent, in the second quarter of 2010 compared to the first quarter.

• The average initial loan amount as of the end of the second quarter of 2010 was $8,650, with an average loan duration of three and half years.

“The majority of participants continue to make saving through their workplace plans a priority,” said James M. MacDonald, president of workplace investing at Fidelity. “However, the current economy has forced some workers to borrow from their 401(k) accounts in order to pay for critical living expenses, ultimately jeopardizing their future retirement.”

Hardship Withdrawals Up, Too

Regarding hardships withdrawals, Fidelity found that:

2.2 percent of active participants took a hardship withdrawal in the second quarter of 2010, up from 2 percent during the second quarter of 2009.

Of participants who took a hardship withdrawal in the 12 months ending June 30, 2010, 45 percent had taken a hardship withdrawal in the preceding year as well.

“We recognize that for some, taking a loan or a hardship withdrawal from their 401(k) may be their only option because it’s their only form of savings,” said MacDonald. However, he advised that plan sponsors "make sure that before workers tap their retirement accounts prematurely, they are fully educated about both the penalty that may be incurred and the long-term implications for their retirement.” (To learn more about how loans and withdrawals reduce retirement savings, see One in Four Withdraw Retirement Account Funds Early—and Pay the Price.)

Reasons for Withdrawals

Plan sponsors report that the top reasons why participants are taking hardship withdrawals are to prevent foreclosure or eviction, to pay for college or to purchase a primary residence.

Fidelity found that the typical age of those taking a loan or hardship withdrawal was between 35 and 55 years old—a worker’s peak earning years—when individuals often have to deal with multiple, competing, financial challenges.

Loans vs. Hardship Withdrawals

Loans must be paid back over five years although this can be extended for a home purchase. While loan interest rates vary by plan, the rate most often used is the "prime rate" plus one or two percentage points. Interest is paid back into the participant's 401(k) account. If not repaid within five years, the loan amount is treated as a distribution and, if participants are not at least 59½ years old, they must pay a 10 percent penalty on top of income taxes on the withdrawn funds.

Hardship withdrawals are subject to certain IRS restrictions (described here). The withdrawal amount is subject to income tax and, if participants are not at least 59½ years old, the 10 percent withdrawal penalty. Participants do not have to pay the withdrawal amount back, which means their ultimate retirement savings will be much more seriously impacted.

Stephen Miller is an online editor/manager for SHRM.

Related Articles—SHRM Online:

GAO Recommends Revising 401(k) HardshipWithdrawal Policy, SHRM Online Benefits Discipline, October 2009

One in Four Withdraw Retirement Account Funds Early—and Pay the Price, SHRM Online Benefits Discipline, May 2008

Related Resources—External:

401(k) Plan Loans: An Overview, 401khelpcenter.com

401(k) Hardship Withdrawals: An Overview, 401khelpcenter.com

Quick Link:

SHRM Online Benefits Discipline

Sign up for SHRM’s free Compensation & Benefits e-newsletter


Job Finder

Find an HR Job Near You
Post a Job


Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect