401(k) participants who have borrowed from their investments rose from 9% in 2005 to 18% in 2007.
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.”
