Sunday, November 17, 2019

Statistics on 401(k) loans and hardship withdrawals

Question: How often in the last 12 months have 401(k) investors obtained a 401(k) loan, made a hardship withdrawal, have either taken out a 401(k) loan or made a hardship withdrawal, or have both taken out a loan and made a hardship withdrawal?

Data:  The data for this question was obtained from the National Finance Capability Study (NFCS) a project of the FINRA Investor Education Foundation.  I examined the two-way frequency table to two questions have you taken out a 401(k) loan and have you made a hardship withdrawal.  People who responded they did not know or did not want to answer were excluded from the analysis.

Results:

The two-way contingency table for the two questions is presented below.


Relationship Between 401(k) Loans and Hardship Withdrawals
Hardship 
Withdrawal Y
es
Hardship 
Withdrawal 
No
Total
401(K) Loan Yes
844
724
1,568
401(K) Loan No
313
11,803
12,116
Total
1,157
12,527
13,684

FINRA foundation National Finance Capability Study https://www.usfinancialcapability.org/downloads.php




The statistics on the incidence of 401(k) loans and hardship withdrawals over the past 12 months are presented below.


Measures of 401(k) Loans and Hardship Withdrawals Past 12 Months
% 401(k) Investors with Loan
11.5%
% 401(K) Investors with hardship withdrawal
8.5%
% of 401(k) Investors with either loan or hardship withdrawal
13.7%
% of 401(k) Investors with both loan or hardship withdrawal
6.2%

Generated from above table.


Observations:

·      13.7 percent of households with a 401(k) plan took some money out of their plan in the last year.

·      6.2 percent of the people took out both a 401(k) loan and a hardship withdrawal.

·      Around 73 percent of hardship withdrawals were from people who also have a 401(k) loan.



Policy Analysis:  Many financial planners argue that people should not take out 401(k) loans.   My view is that many of these people have a lot of debt and very little in the way of emergency funds basically need to withdraw some funds when they can’t pay bills.  

My policy recommendation to help these people is to allow them to distribute 25 percent of their 401(k) account without being subject to tax or penalty.   A preliminary version of this proposal is found in the blog post Reinventing the 401(k) Plan.



David Bernstein is an economist who lives in Colorado and is the author of the book Defying Magnets Centrist Policies in a Polarized World.


Note:   Code used to generate table on relationship between 401(k) loans and hardship withdrawals is

tabulate C10_2012 C11_2012 if (C10_2012==1 | C10_2012==2) & (C11_2012==1 | C11_2012==2), cell




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