More borrowing spells trouble for retirees

401(k) participants who have borrowed from their investments rose from 9% in 2005 to 18% in 2007.
MAR 19, 2008
By  Bloomberg
Retirement plan participants are taking out loans on their investments at an accelerated rate jeopardizing their future assets, a leading Boston College researcher told more than 500 people attending the Money Management Institute meeting yesterday in Boston. The percentage of participants in 401 (k) programs who have taken a loan from their investment rose from 9% in 2005 to 18% in 2007, said Alicia Munnell, director of the Boston College Center for Retirement Research. “I think you can also expect to see more withdrawals,” Ms. Munnell said. Employer-sponsored plans are able to encourage more people to save. “But less than 50% of the workforce, ages 25-64, has any kind of defined benefit or defined contribution plan,” Ms. Munnell said. With the trend towards defined contribution plans, the decision-making has shifted from the employer to the individual. Of those who are eligible to participate in a defined contribution plan, 89% do not contribute the maximum, 20-25% do not contribute at all and 45% do not roll the investment over when they change jobs, she said. “Employers must make 401(k) plans more effective through automation,” Ms. Munnell said. Only 49% of employees participate in 401 (k) plans without automatic enrollment compared to 86% of those who are enrolled automatically. Participants also tend not to increase the amount of their default contributions. A full 61% do not increase the amount over time, she said. Government can help 401(k) plans, she said, by adding an annuity default and inflation-indexed products. “And we need another tier of the retirement system,” said Ms. Munnell. “One third of all households have no other source of income but Social Security. I don’t have a particular proposal, but it could be a funded tier, managed in the private sector with all of the good aspects of a defined benefit plan.”

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