43 percent of those who have taken loans have taken two or more
New York, June 18, 2014 – A new study by TIAA-CREF shows that nearly one-third (29 percent) of Americans who participate in a retirement plan say they have taken out a loan from the savings in their plan. Yet 44 percent of those who have borrowed against their retirement plan savings regret the decision. Among those who took out a loan, 43 percent have taken out two or more loans.
The survey was conducted by an independent research firm and polled a random sample of more than 1,000 adults nationwide on their retirement plans.
Borrowing against the future
Paying off debt was cited as the top reason for taking out a loan from retirement plan savings (46 percent), yet only 26 percent of respondents said paying off debt was a good reason to take out a loan. The No. 2 reason overall for taking a loan was to pay for an emergency expenditure (35 percent).
Women were more likely than men (52 percent vs. 41 percent) to take out a loan to pay off debt; however, men were more likely (40 percent vs. 29 percent) to take out a loan to pay for an emergency expenditure.
Nearly half (47 percent) of those who have taken out a loan from their retirement plan savings borrowed more than 20 percent of their savings, with 9 percent of respondents borrowing more than 50 percent.
In addition to borrowing funds from retirement savings plans, many Americans are also contributing less to their plans while they are paying back the loan. More than half of respondents (57 percent) who took out loans decreased their contribution rate during the payback period. Those age 18-34 were the most likely to decrease their contribution amount (81 percent). Forty-eight percent of women kept the same contribution rate while paying back the loan, compared to only 39 percent of men.
"Too many people have struggled since the 2008 financial crisis and have looked at loans from their retirement plans as a way to ease financial stress. However, individuals should weigh all of their options carefully before borrowing from their plan savings or reducing their contributions," says Teresa Hassara, executive vice president of TIAA-CREF's Institutional Business. "Loans can undermine retirement savings and cause investors to miss out on earnings from rising markets. It's important to evaluate the benefits of taking a loan now against the need for those earnings to build long-term retirement security. Working with a financial advisor can help people make the best decision for their life stage and retirement goals."
Guardrails against loans
There are several ways plan sponsors can help protect employees' retirement assets from early depletion. First, plan sponsors should consider limiting participants to three loans each from their retirement savings. These loans should come from participant contributions rather than employer contributions. This will encourage employees to focus on long-term planning rather than treating the retirement plan as a source of funds during the accumulation years. Limiting loans also can keep down plan expenses and have a positive impact on overall plan fees.
Plan sponsors also can serve as an important educational resource for employees. In fact, according to a TIAA-CREF survey released in February 2014, 81 percent of Americans trust financial information offered by their employer, a greater percentage than those who trusted financial information offered by a traditional financial institution, such as a bank or retirement plan provider (69 percent), or their family (63 percent)1. Employers can use this trusted status to provide credible options about alternatives to loans from retirement savings.
"If loans are necessary to cover an emergency or the loss of a job, people should seek advice to minimize the loan's long-term impact on their retirement savings," explains Hassara. "It's a good example of why plan sponsors should make financial education and advice a core component of their plans."
For more information about the survey, read the executive summary. TIAA-CREF also has prepared articles for plan sponsors and individuals that discuss how they can ensure that retirement plan loans are not undermining retirement readiness.
TIAA-CREF (www.tiaa.org) is a national financial services organization with $569 billion in assets under management (as of 03.31.14) and is the leading provider of retirement services in the academic, research, medical and cultural fields.
The findings come from TIAA-CREF's Borrowing Against Your Future Survey, which was conducted among a sample of 1,000 adults who are currently contributing to a retirement plan, conducted by an independent research firm between May 19, 2014 and May 28, 2014.
The survey was conducted by KRC Research online among a sample of 1,000 employed adults, age 18 years and older, currently contributing to an employer-sponsored retirement plan. Data was weighted by key demographic variables to ensure the sample is representative of the employed population contributing to defined-contribution plans.
Respondents for this survey were selected from among those who have volunteered to participate in online surveys and polls. Because the sample is based on those who initially self-selected for participation, no estimates of sampling error can be calculated. All sample surveys and polls may be subject to multiple sources of error, including, but not limited to, sampling error, coverage error, error associated with nonresponse, error associated with question wording and response options.