Many using 401(k)s as a safety net; Tapped-out workers tapping retirement funds, Fidelity says

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The Boston Globe
By: Erin Ailworth
August 21, 2010

American workers, many in their prime earning years, are raiding their retirement savings in record numbers to either stave off eviction or foreclosure, pay for college, or buy a home.

The number of people who took early withdrawals from their retirement accounts jumped 38 percent in the three months ending in June, according to Fidelity Investments of Boston, one of the world's largest retirement plan administrators. During the second quarter of this year, 62,000 plan participants took out so-called hardship withdrawals, up from 45,000 in the previous quarter. To make a hardship withdrawal, people must demonstrate an immediate and heavy financial need.

Even more telling, the number of people taking loans from their 401(k) is at a 10-year high, according to the investment firm. Of the 11 million people with retirement funds analyzed by Fidelity, 22 percent had loans outstanding.

``The economy is really forcing people to perhaps look to other sources to help supplement their reduced household income or the fact that they have less take-home pay,'' said Beth McHugh, vice president of market insights at Fidelity. ``The challenge is that folks may not be thinking about the long-term implications of doing so.''

Most financial planners advise against tapping retirement funds early because there are taxes and penalties involved, and most plans won't accept new contributions to an account for at least six months after a withdrawal. And then there's the long-term danger of not having enough money to live on during retirement.

Ted Truscott, chief executive of US asset management for Ameriprise Financial, a financial services firm with operations in Boston, called Fidelity's findings ``startling.''

``If the economy is starting to bite into retirement savings, you are setting yourself up down the road,'' Truscott said. ``I think the fact that people will come in, reduce their retirement savings, and pay a penalty suggests that there are some people out there who are getting pretty desperate.''

Fidelity, which analyzed 17,000 retirement plans representing 11 million participants, also noted that the people dipping into their retirement savings are, on average, between 35 and 55 years old - in other words, workers in their peak earning years, who should be socking money away.

The average 401(k) account at the end of the second quarter was at $61,800. That's up 15 percent from the same time last year, according to Fidelity. The average initial loan from an account was $8,650, and the average loan duration was three and a half years.

Boston bankruptcy lawyer Richard N. Gottlieb said that 25 to 30 percent of his clients have drawn money out of or borrowed from their 401(k)s recently, compared with less than 10 percent in 2008. Those people, Gottlieb added, are often trying to save their home or pay off debt.

``I have seen clients who have literally exhausted their 401(k) contributions,'' Gottlieb said.

Bankruptcy, he added, might be a better option because it discharges debt and gives people more time to work out their financial problems, leaving their retirement funds - which are protected from bankruptcy - intact.

Leslie Linfield, executive director of the nonprofit Institute for Financial Literacy, which promotes financial education, said she is not entirely surprised to hear the age range of those taking money from their retirement accounts. It is the same age range, Linfield explained, that the nonprofit is seeing when it looks at the increasing number of bankruptcies.

``They're actually trying to stave off bankruptcy,'' she said. ``They're robbing Peter to pay Paul.''

While borrowing against your 401(k) account may hurt your long-term returns, financial planners say a loan could be a viable option for some people. Michael Tow, a certified financial planner at New Boston Financial, said that he urges clients who absolutely need to take money from their retirement funds to do it in the form of a loan, so that the money is paid back with interest.

``You're borrowing from yourself so you're not getting charged 18 percent from a credit card company, but the thing is, you do stop the growth on a 401(k),'' Tow said.

Globe correspondent Bonnie Kavoussi contributed to this report.

Erin Ailworth can be reached at

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