Deloitte is reporting that 401(k) loan defaults have cost participants more than $2.5 trillion in lost retirement earnings. As shocking as that number seems to be it really isn’t. We’ve been referring to 401(k) plans as glorified savings accounts since our inception, as the permitting of loans, and in some plans, multiple loans, is improper if these are truly retirement vehicles!
According to the Deloitte study titled, “Loan Leakage: How can we keep loan defaults from draining $2 trillion from America’s 401(k) accounts?” 90% of 401(k) plans offer loans and roughly 40% of the participants have taken a loan to finance “their current consumption”. Unfortunately, about 10% of 401(k) loans default each year. For the plan participant that has defaulted they lose on average $300,000 of future retirement benefits.
Deloitte further reports that in 2018 alone, $7.3 billion worth of 401(k) loan defaults occurred and $48 billion worth of voluntary plan cash-outs, creating $155 billion in opportunity costs and an estimated $210 billion account leakage at retirement.
We highly recommend the creation of side-pocket accounts that would be payroll deducted and capped at some $ amount, such as $1,500. Money saved in these accounts could be used to meet short-term (and perhaps, emergency) expenses, while the balance of contributions would fund a long-term retirement account. We know through countless studies that most employees fail to save outside of an employer-sponsored fund. Having a payroll deducted side-pocket may be just the way to increase savings for America’s struggling working class while protecting retirement assets for long-term growth.