“We can’t let people make their own errors,” Vanguard founder John Bogle noted at last year’s Retirement Income Symposium in Boston, when commenting on the effectiveness of 401(k)s. “It’s too expensive.”
Bogle’s view, along with other industry critics, was bolstered on Monday by New York Life Retirement Plan Services’ first “State of the Retirement Industry” report.
It found 401(k) plan participants who take out loans might sabotage their retirement savings. Participants who take loans are more likely to save at a lower contribution rate than their counterparts, and are not likely to repay the loan when leaving their employer.
The average contribution rate for a participant who takes out a loan from their 401(k) is 5.63%, compared with 7.23% for participants without loans, the report said. Additionally, more than two-thirds of participants with an outstanding loan balance who leave their employer will take a cash distribution from their retirement plan rather than paying back the loan. Preventing this so-called “leakage” is very important in helping workers successfully save for retirement, it concludes.