Investors in 401(k) plans who take loans from their accounts are more likely to save at a lower contribution rate than their counterparts, and are not likely to repay the loan when leaving their employers, according to New York Life Retirement Plan Services’ first annual "State of the Retirement Industry" report.
When it researched its defined contribution platform, New York Life found that the average contribution rate for a participant who takes loans from a 401(k) is 5.63 percent, while the rate is 7.23 percent for participants without loans. The study also found that more than two-thirds of participants with outstanding loan balances on their 401(k)s will cash out of their plans if they leave their employers rather than paying back the loans.
“Americans are not saving enough for retirement, and compounding this problem is the fact that loans can drain precious retirement dollars,” said Rachel Rice, the managing director of marketing and product development at New York Life Retirement Plan Services. “As an industry, we need to reverse the ATM mentality that has developed around 401(k) savings by encouraging sponsors to rethink loans from a plan design perspective, and enabling participants to differentiate between everyday, emergency and retirement savings.”
According to New York Life, loans against 401(k) balances have often been offered as an attempt to increase plan participation and allow participants access to their money in times of financial hardship. Yet the firm’s research indicates that average participation rates for plans without loans are only 9.6 percentage points lower than those plans with loans (67 percent participate in plans without loans while 76 percent participate in those with loans). While eliminating loans entirely from 401(k) plans may not be practical, New York Life asserts that the number and size of loans available to participants should be limited in scope.
New York Life Retirement Plan Services administers more than 1,750 plans, representing 1.15 million American workers. According to the study, the average worker in a New York Life 401(k) plan is 43 years old, earns $68,700 annually, contributes 6.25 percent of his or her salary into the 401(k) and has an account balance of $55,270.