The percentage of participants in 401(k) programs who have taken a loan from their investments rose from 9 percent in 2005 to 18 percent in 2007. This trend of increased borrowing took place during relatively good economic times of high employment and low mortgage foreclosures. The outlook is for the borrowing rate to increase during tougher economic times.
The good news about borrowing from a 401(k) plan is that you are essentially borrowing and paying back yourself at an interest rate that is much less than a credit card cash advance. Repayment is made by automatic deductions from earnings. So what’s the problem? Simple, when you reduce the balance of a retirement account you reduce the earning power of these funds.
Employer-sponsored plans are able to encourage more people to save but less than 50 percent of the workforce, ages 25-64, has any kind of defined benefit or defined contribution plan.
Of those who are eligible to participate in a defined contribution plan, 89 percent do not contribute the maximum, 20 percent to 25 percent do not contribute at all and 45 percent do not roll the investment over when they change jobs.
Only 49 percent of employees participate in 401 (k) plans without automatic enrollment compared to 86 percent of those who are enrolled automatically.
Participants also tend not to increase the amount of their default contributions. A full 61 percent do not increase the amount over time.
Source: Workforce Management (www.workforce.com)