Spokane Journal of Business

More people taking loans from 401(k)s, study finds

Among borrowers, largest percentage were those in 50s, 60s, bank data show

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Through an analysis of participants enrolled in Wells Fargo-administered defined contribution plans, the bank says it found that 28 percent more people took out loans from their 401(k) accounts in the fourth quarter of 2012 than in the year-earlier quarter.

Also, the average new-loan balance increased 7 percent, to $7,126, compared with those taken out in the fourth quarter of 2011, it says.

Of the participants who took out loans, the greatest percentage were to people in their 50s (34 percent), followed by those in their 60s (29 percent), and then by those in their 40s (27 percent). The increase among participants in their 50s was nearly double the increase among those under 30. This is based on an analysis of a subset of 1.9 million eligible participants in retirement plans that Wells Fargo administers.

"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," says 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."

In addition to the 2012 new loan activity, the Wells Fargo data show that nearly one-fifth of people 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 older participants are taking more loans out than younger people, the younger a participant is, the greater the loan tends to be as a percentage of their 401(k) account balance. For those under 30, the outstanding loan balance equated to an average 38 percent of their remaining untouched balance. For those over 60, it dropped to 21 percent. However, only about 9 percent of all participants under 30 have an outstanding loan, compared with almost 25 percent of participants in their 40s.

"While the increase in loan activity is concerning, we know that loans are not the biggest driver of leakage from retirement savings," says Nordquist. "In fact, 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."

Although loan activity is on the rise, people are contributing more of their income to their 401(k) plan. 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).

"It is encouraging that people are saving at higher rates by putting a higher percentage of their income into their 401(k) plans," says Nordquist. "Participating in an employer-sponsored retirement plan is a good first step, but we want to make sure that people are saving an adequate amount as well."

Additional trends noted in the analysis include the following:

•Of the participants who increased their deferral rates from 3 percent to a range of 4-6 percent, significant numbers were in their 20s and 30s.

•Of the participants who increased rates from the 4-6 percent range into the 7-9 percent range, most were in their 30s.

•Participants over age 50 increased rates from the 7-9 percent range to 10 percent or more.

•About 25 percent of all 401(k) plan assets are now in managed investment options, up 4 percent from a year ago.

Despite this progress, almost 20 percent of those 65 and older have their entire balance in a single investment. Of those, over 70 percent—or 14 percent of all participants over 65—have all their money in fixed-income investments.

Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.4 trillion in assets. Founded in 1852 and headquartered in San Francisco, it provides banking, insurance, investments, mortgage, and consumer and commercial finance through more than 9,000 stores, 12,000 ATMs, and the Internet, and has offices in more than 35 countries to support the bank's customers who conduct business globally. The company was ranked No. 26 on Fortune's 2012 listing of America's largest corporations.

Wells Fargo Institutional Retirement and Trust, which is part of the company, provides retirement management, investments, and trust and custody services tailored to meet the needs of institutional clients.

Wells Fargo ranked seventh in the number of plan participants and assets in the 2012 PLANSPONSOR magazine recordkeeping survey, with 3.7 million retirement plan participants, and $265.7 billion in retirement plan assets.

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