401(k) Loans Rise While Savings Stay Low
Today, we will examine the growing trend of 401(k) loans amidst a backdrop of low savings rates. A recent report by T. Rowe Price reveals that 401(k) loans have seen an uptick since reaching a low in twenty-twenty, although they have not yet returned to pre-pandemic levels. Initially, the onset of COVID-19 prompted a decline in loans, largely due to the availability of COVID-related distributions. However, current data shows that more participants across all age groups are now resorting to loans to meet their financial needs.
Interestingly, while the overall average loan amounts decreased from twenty-twenty-two to twenty-twenty-three, participants aged fifty to fifty-nine continue to carry the highest loan balances.
The Savings Shortfall
The study highlights a concerning trend: 70% of participants lack sufficient savings to cover six months’ worth of expenses. Furthermore, 46% of participants reported having saved less than $1,000 for emergencies. Key factors contributing to this inadequate savings include rising credit card debt and increasing mortgage payments, which are straining household finances.
Engaging Participants Through Education
Despite these challenges, the report indicates a positive shift in participant engagement thanks to personalized communications. In twenty-twenty-three, participants increasingly accessed digital retirement planning content, particularly educational videos focused on financial wellness, budgeting, and retirement readiness.
Key findings from the report include:
- Participants were 24 times more likely to remain invested when fully engaged in a target date product.
- Those who took loans or faced financial hardships were half as likely to opt for auto-increases in their contributions.
- Fewer than 13% of eligible participants began catch-up contributions upon reaching age fifty.
- After watching personalized educational videos, participants were five times more likely to seek additional resources and twice as likely to increase their deferral rates.
The Importance of Financial Education
Rachel Weker from T. Rowe Price underscores the critical need for financial education to empower participants in managing debt and enhancing their overall financial health while balancing retirement savings. As participants become more educated about their options, they can make informed decisions that positively impact their financial futures.
In conclusion, while the rise in 401(k) loans reflects pressing financial needs, the accompanying low savings rates highlight the importance of ongoing education and support for participants. By prioritizing financial literacy and offering tailored resources, plan sponsors can help participants navigate their financial challenges and work toward a more secure retirement.
