According to a just-released report from Aon Hewitt, about 28 percent of active participants in defined-contribution retirement plans had an outstanding loan in 2010–a record high, according to the firm. The average balance of the outstanding amount was $7,860, which represented 21 percent of these participants’ total plan assets, according to the study, entitled Leakage of Participants’ DC Assets: How Loans, Withdrawals, and Cashouts Are Eroding Retirement Income.
The study, encompassing 1.8 million employees across approximately 110 large plans, found that middle-aged and middle income are most likely to have outstanding loans–participants in their 40s, and those earning between $40k and $60k per year had significantly higher loan prevalence.
Although most plans require employees who are terminated to immediately repay in full any outstanding 401k loans they have, the study found–not surprisingly–that nearly 70 percent of such workers subsequently default on the repayment, with the default percentage jumping to 80 percent among participants in their 20s. However, the study also found that on average, active employees default on their loans less than 3 percent of the time.
However, new legislation just introduced in Congress proposed by Senators Herb Kohl of Wisconsin and Mike Enzi of Wyoming would limit the number of 401k loans employees could take and allow them more time to pay back outstanding balances, penalty-free, should they lose their jobs.