401(k) Trends: Hardship Withdrawals on the Rise

Fidelity Investments is out with a new report on trends in retirement savings, and it's worth paying attention for a couple of reasons:

1. Fidelity is HUGE, the biggest supplier of retirement plans to American workers, they hold something like 20% of the market for 401(k)'s, and;
2. Their size makes their data sets a good proxy for the market as a whole.

So, what's going on out there? Well here are the highlights from Andrew Schreiner, Senior Director of Government Relations and Public Policy for Fidelity:

The data highlight that while the savings behavior of the majority of participants has remained strong (balances are up 15% year over year, average deferral rates have remained at 8% and more participants increased deferrals than decreased), loans and hardship withdrawals have increased. A few key points:

• Loans initiated over the past 12 months grew to 11 percent of total active participants, up from 9 percent the year before
• The portion of participants with a loan outstanding also grew by 2 percentage points in Q2 to 22%
• As of the second quarter, 2.2 percent of Fidelity active participants took a hardship withdrawal, up from 2.0 percent the year prior

Plan sponsors report the main reasons for the increase in loan and hardship activity have been to prevent foreclosure or eviction, pay for college or to purchase a home.

A .2% increase in the number of hardship withdrawals might not seem like much, but for Fidelity that means something like 17,000 participants, and look at the reason for the withdrawals: to avoid foreclosure, pay for college, purchase a home.

The bad news in this scenario really highlights something we've been talking about for a long time now, people have multiple savings needs and in recent years savings behavior has been such that people a) don't save enough; and b) focus perhaps too much on retirement savings (where most of the incentives to save are actually located.)

Retirement savings is critical, but people have immediate and mid-term needs as well. It's a tough position to be in when you realize that taking a hardship withdrawal or loan is the best option you have, but I'll guarantee that's where a lot of those 17,000 participants found themselves. Thanks to Fidelity for sharing their data, you can see their press release and report attached to this blog post. It's a great reminder about some key points:

• People have multiple savings needs;
• Retirement is critical, but you have to get there first; and
• We should do more to incent other types of saving.