Loans from 401(k)s, known as “leakage,” will spark a potential $2.5 trillion shortfall in retirement account balances, according to analysis released Wednesday by Deloitte.
The Deloitte research — which used estimates in loan defaults, future withdrawals and lost opportunity costs projected from a participant at age 42 until age 65, and is based on a 10-year business cycle — estimates $7.3 billion in loan defaults in 2018 alone.
Deloitte projected earlier academic and private market research from 2006 to 2018 using information from the Department of Labor’s Private Pension Bulletin on growth and plan participation.
In its latest research, Deloitte also factored in an investment return of 6% to come up with the $2.5 trillion projected shortfall figure.
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Leakage, Deloitte warns, could not only harm retirement savings for many but cause a “significant detriment” to investment markets in the U.S. if there are no solutions or guardrails put in place to stem the tide.
“This potential retirement shortfall is likely to produce a considerable shift in standards of living during a period where participants are lacking employment income and relying upon their nest eggs,” Deloitte warned in its Retirement Plan Loan Leakage paper.