Retirement plan loans down in Q4, but defaults up, BofA study shows

Fewer 401(k) participants are taking loans against their plans, according to the first installment of a new quarterly report from Bank of America. However, defaults did tick up slightly last quarter.

According to the bank's 401(k) Participant Pulse, just under 61,000 participants borrowed from their workplace plan in the fourth quarter, down 12% from the fourth quarter. Meanwhile, loan defaults rose slightly, to 15.9%, in Q4, with the average loan amount of $7,500 being the lowest for all four quarters of 2022.

The report also showed fewer participants taking hardship withdrawals to meet their immediate financial needs. On average, just 0.4% of participants took a hardship distribution in Q4, down from 0.5% in Q3, and the number of participants taking such withdrawals totaled 12,350, down 18% compared to Q3, according to the report. The average size of a hardship withdrawal also declined in Q4 from Q3, by 8%.

Bank of America says its data draw from the company’s more than 3 million 401(k) plan participants.

“We are deeply committed to understanding how current financial realities are affecting consumers’ long-term financial health and planning,” Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, said in a statement. “Long-term retirement planning is a critical metric when considering an individual's financial well-being, as well as the economy as a whole.”

Elsewhere, the study showed that plan participants' average contribution rate dropped slightly, from 6.6% at the end of 2021 to 6.4% at the end of 2022, suggesting consumers may have been a bit more focused on their short-term financial needs last year.

Generationally speaking, almost half of millennials (47%) contributed 7% or more to their plan — more than any other generation, the study showed. Meanwhile, baby boomers had the highest percentage of participants (43%) contributing 3% or less.

Finally, the Bank of America study revealed that 30- and 40-year-olds tend to be big borrowers. More than half the loans taken in 2022 involved participants between the ages of 30 and 49. And Gen Xers — those who are 43 to 58 — had more participants (3.1%) with loans in default at year-end than any other generation, according to the report.

“For most American workers, their employer-sponsored retirement plan is the best vehicle they will ever have to build financial wealth for themselves and their families. Consistent with this opportunity, the 401(k) assets are generally designed to be long term," said John Macielag, president of All Seasons Capital & Advisory at Stifel Independent Advisors. "As such, we typically recommend 401(k) borrowing to be the credit of last resort.”

Macielag adds, though, that since interest rates are high right now, there's an argument for utilizing 401(k) loans as part of an overall household budget.

“Be wary of default, though," he said. "A default means taxes are due on money you may not have in hand anymore.”