NCPA - National Center for Policy Analysis


September 3, 2008

Despite penalties, more and more workers are borrowing from 401(k) plans. They tap into their nest egg by either taking hardship withdrawals, which require proof of a severe financial need, or they get a loan, which they have to pay back, usually within five years, says the Washington Post.

Not all employers will permit either one, but one thing remains the same: taking a withdrawal or loan can have a long-term negative impact.  And with the increase in credit card debt, plan holders and the availability of borrowing against a 401(k), society is starting to view it as more than a retirement plan, says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis.

Indeed, some of the nation's largest 401(k)-plan administrators have reported increases in hardship withdrawals:

  • At T. Rowe Price, withdrawals were up 19 percent in June compared with the same period last year.
  • At Vanguard, they increased 8.6 percent in 2007 from 2006.
  • Hewitt Associates, an Illinois-based human resource consulting company that tracks 401(k) trends across the country, found that 5.4 percent of plan participants took hardship withdrawals in 2007, up from 4.9 percent in 2006.
  • The withdrawal is counted as income and subject to tax; on top of that, there is a 10 percent penalty if the employee is younger than 59 and a half.

However, borrowing from a retirement fund could have implications that reach beyond individuals to the economy.  If Americans were to deplete their 401(k) funds, they would probably have to work beyond the retirement age of 65 or risk living in poverty, says the Post.

Source: Nancy Trejos, "Using Nest Eggs Before Maturity," Washington Post, September 2, 2008; also: Robert Reeves and Pamela Villarreal, "401(k) Loans = Retirement Insecurity," National Center for Policy Analysis, Brief Analysis, No. 615, April 25, 2008.

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