Burned by plummeting home prices and steep credit card fees, a growing number of U.S. consumers are tapping 401(k) accounts for extra cash.
The activity has grown in recent years and is peaking at the moment as workers crack open retirement accounts to bankroll holiday gifts. It remains to be seen, however, how many will be able to patch those nest eggs up again.
Almost 19 percent of the country’s 50 million or so 401(k) participants have loans outstanding on their accounts, up from 15 percent five years ago, according to data from the Investment Company Institute. Consumers have borrowed hundreds of billions of dollars from the roughly $3.2 trillion in 401(k) accounts.
And the loans are spread across workers of all ages and income levels.
Paul Guthrie, a senior analyst on space exploration at the Tauri Group, siphoned $25,000 from his 401(k) to buy a condominium in downtown Washington in early 2009.
“Emotionally, it just seemed like a very easy way to do it, because I never see the money,” he said.
About $50 of his pay automatically goes towards the loan every month, which covers the principal and an interest payment around 3 percent. Meanwhile, Guthrie, 33, still maxes out his contributions to the plan.
Unfortunately, many of those tapping their 401(k)s aren’t as savvy as Guthrie. And many aren’t using the funds for anything nearly as valuable as home-equity in one of the country’s most stable real estate markets.
Borrowing from retirement funds is likely one of the reasons that U.S. consumers spent a record $52 billion on Black Friday shopping this year. Catherine Golladay, vice president of 401(k) participant services at Charles Schwab Corp., said retirement funds have become a “cash-flow tool” for millions of U.S. households.
“In 2009, it was a lot of people trying to save their homes or in a situation where they had lost their job,” she said. “Today, it’s sort of lifestyle spending.”
Golladay noted that 401(k) borrowers often stop contributing to their plans while their loan is outstanding, giving up any matching funds their employers may offer. However, the biggest danger is being laid off, at which point the full value of the loan comes due in a matter of months.
“I see it all the time,” said Gail Rosen, an accountant who owns an eponymous tax consultancy serving about 800 individuals and small businesses from Martinsville, N.J. In fact, when she fielded a call from The Daily last week, Rosen was in the middle of crunching numbers for a client who had taken an $18,000 loan on his 401(k) to pay for a divorce. He was laid off shortly afterward, and is now facing a 10 percent fine and about $7,200 in taxes if he does not repay the loan by March.
Recent 401(k) raids have been triggered by divorces and would-be entrepreneurs starting a company, Rosen said. “I always tell people it’s the worst idea in the world, but it’s tough out there,” she said.
Some companies try to discourage retirement account raids. About a third of employers that offer a 401(k) plan have restrictions prohibiting loans. And an increasing amount of providers have rules that only allow one outstanding loan at a time.
“Most realize that in a best-case scenario, they wouldn’t want that provision in there at all,” Golladay said.
Meanwhile, financial planners generally try to steer clients away from 401(k) loans. Lance Roberts, CEO of Streettalk Advisors, a Texas-based firm that manages about $440 million in retirement savings, takes a more proactive approach.
“I have a bat in the back of my office and I chase people around the office with it when they ask about it,” he said.
Roberts said 401(k) loans are surging because Americans are still living beyond their means, but have shied away from credit cards and home equity loans. After all, the money is theirs, even if they aren’t supposed to touch it for awhile.
“We effectively shifted the burden of retirement planning from companies to individuals,” Roberts said. “But the problem is, individuals have never fully realized that their 401k plan is their retirement.”
The activity has grown in recent years and is peaking at the moment as workers crack open retirement accounts to bankroll holiday gifts. It remains to be seen, however, how many will be able to patch those nest eggs up again.
Almost 19 percent of the country’s 50 million or so 401(k) participants have loans outstanding on their accounts, up from 15 percent five years ago, according to data from the Investment Company Institute. Consumers have borrowed hundreds of billions of dollars from the roughly $3.2 trillion in 401(k) accounts.
And the loans are spread across workers of all ages and income levels.
Paul Guthrie, a senior analyst on space exploration at the Tauri Group, siphoned $25,000 from his 401(k) to buy a condominium in downtown Washington in early 2009.
“Emotionally, it just seemed like a very easy way to do it, because I never see the money,” he said.
About $50 of his pay automatically goes towards the loan every month, which covers the principal and an interest payment around 3 percent. Meanwhile, Guthrie, 33, still maxes out his contributions to the plan.
Unfortunately, many of those tapping their 401(k)s aren’t as savvy as Guthrie. And many aren’t using the funds for anything nearly as valuable as home-equity in one of the country’s most stable real estate markets.
Borrowing from retirement funds is likely one of the reasons that U.S. consumers spent a record $52 billion on Black Friday shopping this year. Catherine Golladay, vice president of 401(k) participant services at Charles Schwab Corp., said retirement funds have become a “cash-flow tool” for millions of U.S. households.
“In 2009, it was a lot of people trying to save their homes or in a situation where they had lost their job,” she said. “Today, it’s sort of lifestyle spending.”
Golladay noted that 401(k) borrowers often stop contributing to their plans while their loan is outstanding, giving up any matching funds their employers may offer. However, the biggest danger is being laid off, at which point the full value of the loan comes due in a matter of months.
“I see it all the time,” said Gail Rosen, an accountant who owns an eponymous tax consultancy serving about 800 individuals and small businesses from Martinsville, N.J. In fact, when she fielded a call from The Daily last week, Rosen was in the middle of crunching numbers for a client who had taken an $18,000 loan on his 401(k) to pay for a divorce. He was laid off shortly afterward, and is now facing a 10 percent fine and about $7,200 in taxes if he does not repay the loan by March.
Recent 401(k) raids have been triggered by divorces and would-be entrepreneurs starting a company, Rosen said. “I always tell people it’s the worst idea in the world, but it’s tough out there,” she said.
Some companies try to discourage retirement account raids. About a third of employers that offer a 401(k) plan have restrictions prohibiting loans. And an increasing amount of providers have rules that only allow one outstanding loan at a time.
“Most realize that in a best-case scenario, they wouldn’t want that provision in there at all,” Golladay said.
Meanwhile, financial planners generally try to steer clients away from 401(k) loans. Lance Roberts, CEO of Streettalk Advisors, a Texas-based firm that manages about $440 million in retirement savings, takes a more proactive approach.
“I have a bat in the back of my office and I chase people around the office with it when they ask about it,” he said.
Roberts said 401(k) loans are surging because Americans are still living beyond their means, but have shied away from credit cards and home equity loans. After all, the money is theirs, even if they aren’t supposed to touch it for awhile.
“We effectively shifted the burden of retirement planning from companies to individuals,” Roberts said. “But the problem is, individuals have never fully realized that their 401k plan is their retirement.”
