Almost 1 million Fidelity Investments 401(k) account holders took out a loan from their accounts in the past year, including a small yet troubling number of millennials who used the money to buy homes, the financial services giant said Wednesday.
As might be expected, to pay back those loans, some people cut back on plan contributions or stop contributing altogether, which can result in retirement income that's hundreds of dollars less per month than it could have been.
"The number of investors borrowing from their 401(k) has trended upwards in recent years, with more than two million investors now having an outstanding loan," said Doug Fisher, senior vice president of thought leadership and policy development at Fidelity Investments.
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"Fidelity's top concern is that within five years of taking a loan, 40 percent of borrowers decrease their savings rate, and more than a third of those stop saving altogether. Reducing your savings rate today could significantly reduce your account balance upon reaching retirement and therefore your monthly income in retirement."
To illustrate how dire the consequences could be, the Boston-based company conducted a hypothetical analysis of three 401(k) investors. According to the analysis, each hypothetical investor begins saving at age 25, putting in 6 percent of a $50,000 salary and getting a 4 percent employer match for a total savings rate of 10 percent. The company then calculated the estimated monthly retirement income they'd get from their 401(k) for each of three scenarios, beginning at age 35.
The first investor reduced that initial 10 percent savings rate to zero for 10 years, and ended up with a retirement benefit of $1,960 per month. The second, who only reduced it to 5 percent for five years, got $2,470, while the third, who kept saving at the full 10 percent rate for 10 years, got $2,650 per month.
Home loans, according to Fidelity, are responsible for some people borrowing larger-than-average sums from their plans. The average general loan taken is $9,100, but the average home loan taken is $23,500 — representing 25 percent of the average borrower's pre-loan 401(k) balance.
Over the past year alone, Fidelity said, more than 27,000 of its account holders took loans specifically for the purchase of a home. While that's a small percentage of Fidelity's overall 401(k) loan-taking population, it is a trend the company has seen increasing over the past five years.
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