In Spite of the Recovery, More Workers Are Borrowing From 401(k)s

In Spite of the Recovery, More Workers Are Borrowing From 401(k)s
One in three employees reported taking out hardship loans or distributions from their 401(k)s in 2012, up from 25 percent in 2011 (Photograph by Jeffrey Coolidge)
Photograph by Jeffrey Coolidge

One statistic about U.S. household finances is so startling that it deserves its own post: Nearly one in three employees say they took a hardship loan or distribution from their 401(k) retirement accounts last year, up from one in four in 2011. Considering that hardship loans and distributions can trigger penalties or other costs, this is an expensive proposition.

Then there are the ripple effects: Borrowers miss out on any investment gains, like the market’s big rally over the past four years, and—as Nick Summers and I reported in our mega financial planning flow chart—it’s wise to shore up retirement savings before paying for other things, such as buying a house or saving for a kid’s education.

To understand what’s driving the increased desperation, even as the U.S. economy recovers, it helps to break down the data (PDF). The financial-education firm behind the study, Financial Finesse, provided Bloomberg Businessweek with additional stats that shows three groups struggling more than others:

Women. Thirty-four percent of female employees said they took 401(k) loans or hardship distributions, compared to just 23 percent of men—a wider gap than in 2011.

Lower-income employees. Forty-five percent of employees earning from $35,000 to $60,000 said they had to tap their 401(k)s, compared to 11 percent of people earning more than $200,000.

Younger workers. Those aged 30 to 44 reported a big increase in hardship loans and distributions, going from 27 percent in 2011 to 37 percent in 2012.

Whether these trends continue depends on how much more the economy rebounds. If it continues to grow unevenly, more Americans will need to raid their retirement funds to make ends meet.

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