Data from Fidelity Investments for the second quarter of 2010 shows that while investors are saving more in their 401(k) plans, hardship loans and withdrawals are also on the rise. The release of the findings on Friday, August 2, suggests that hard times are far from over regardless of some signs of recovery.
While the average 401(k) balance was up 15% from last year to $61,800, so too were initiations of loans and hardship withdrawals, Fidelity found. Even as some workers (5.3%) increased their deferral contributions, others decreased them (2.9%) during the second quarter; the average deferral/contribution rate held steady at 8%, with 32% of employees deferring 10% or more of their salary.
But even as those lucky enough to be able to maintain their retirement holdings did so in the second quarter, others who were not so fortunate sought money to forestall eviction or foreclosure, or to pay for college tuition or the purchase of a home. Loans initiated, which had stood at 9% of active participants in Fidelity retirement plans last year, rose over the year to 11%; outstanding loans rose two percentage points in the quarter to 20%. The average age of those workers taking withdrawals/loans is between 35 and 55, placing many of them squarely in the sandwich.
In the first quarter of 2010, 45,000 participants initiated a hardship withdrawal; in the second quarter that number was 69,000. Not only that, but of those who took a hardship withdrawal one year prior, 45% took another in the twelve months ending in the second quarter of 2010. Since the rate of savings in general has been so low for so long, and with the collapse of the housing market and subsequently home equity loans, often 401(k)s are the primary vehicle for savings and thus all that's left to be tapped in a tough economy. And balances are already down, thanks to drops in mutual funds as stocks dropped more than 10% in the second quarter.
James McDonald, president of Fidelity Investments' Workplace Investing said in a statement that ". . . the current economy has forced some workers to borrow from their 401(k) accounts in order to pay for critical living expenses, ultimately jeopardizing their future retirement."