Participants November 24, 2015

DC Participant Loan Takers Go On to Save Less

Fidelity finds borrowers tend to save less on average over time after their first loan.
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Earlier this year Fidelity reviewed loan and withdrawal activity among 21,200 retirement plans and 13.5 million participants, finding loans are often viewed as an unavoidable financial necessity for those taking them.

Despite the perceived necessity, retirement savers almost never see a long-term improvement in the financial situation by choosing a loan or even a hardship withdrawal, Fidelity says.

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Overall about one in 10 plan participants elected to take a loan last year, the research shows, with an average amount around $10,000. Hardship withdrawals occur even less frequently—drawn by about 2.2% of participants during the year-long sample period. Most often participants taking a hardship withdrawal cited medical expenses (19%) or the need to avoid foreclosure on a home (34%).

Part of what makes taking loans harmful for the long-term is that those who take one loan are likely to take at least one more in the future. While 50% of 401(k) borrowers take just one loan, the other 50% borrow multiple times, Fidelity says, and 10% go on to take a hardship withdrawal.

The reporting echoes earlier research, published by the National Bureau for Economic Research (NBER), which suggests when a plan sponsor permits multiple rather than only one loan, each individual loan tends to be smaller, but the probability of plan borrowing nearly doubles, and the aggregate amount borrowed rises by 16%. The researchers contend that this suggests employees perceive that easier loan access is actually an encouragement to borrow.

Perhaps unsurprising, Fidelity finds borrowers tend to save less on average over time after their first loan. For example, fully one in four borrowers reduced their savings rate within five years of taking a loan, generating $180 to $690 less per month in anticipated annuitized retirement income. Even more troubling, Fidelity concludes, 15% of those who take a loan go on to stop saving altogether within a fairly short period of time. 

These findings and others are presented in a helpful infographic here.

Data and Research November 23, 2015

Participants Lose Out With Focus on Student Debt

A new LIMRA study finds workers who choose to pay down debt over saving for retirement fall way behind their peers by age 65. 
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It’s almost hard to believe, but LIMRA Secure Retirement Institute research finds paying down $30,000 in student loan debt, if prioritized over retirement savings, can rob a given worker of up to $325,000 in potential savings by retirement.

The underlying research focuses on Millennials who begin their careers with at least $30,000 in student loan debt and choose to pay this down before turning to retirement savings. When compared with the saving patterns of their debt-free peers, those who choose to focus first on student debt end up with $325,000 less at retirement. For $50,000 in student debt, the amount missed is closer to $530,000.

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LIMRA explains that, in 1990, the average student loan debt was around $10,000, but by 2015 the average student loan debt more than tripled, reaching $33,000.

“The general belief has always been an investment in education was worthwhile because it would result in a higher paying career,” LIMRA says. “However, the recession impacted Millennials’ at the start of their careers, with many ending up unemployed or underemployed for years after they graduated. In addition, nine in 10 will not have access to a defined benefit plan, and are likely to have to fully fund their retirement, far lower than their parents and grandparents.”

The good news is companies that administer 401(k) and other defined contribution (DC) plans report high participation rates by Millennials, LIMRA says. “The bad news is Institute research finds Millennials with student loan debt are saving at a lower rate,” researchers explain. “Millennials without student loans are 60% more likely to maximize their employer match compared with those who are paying education loans.”

LIMRA says the research underscores the importance for parents and students to examine the amount of student loan debt they are willing to take on, understanding the long-term implications of this debt throughout their lives. It also advocates for better linking the student debt and retirement savings conversations. 

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