Are 401(k) Loan Defaults Set To Resurge?

Tyler Durden's picture




 

Since the financial crisis hit and exposed the reality of a credit-fueled economic growth strategy, Americans have tried to maintain any kind of quality of life. With the HELOC ATM empty, they switched to Credit Cards and once limits were full, there was only one place left - their retirement plans. As the LA Times reports today, Americans are borrowing huge amounts of money from their 401(k) retirement plans - and then having big trouble paying off their debt. Stunningly, in recent years 20% to 28% of people eligible to borrow from their 401(k) accounts have an outstanding loan at any given time, the Navigant Economics study said, having borrowed a collective $105 billion from their 401(k) accounts as of 2009 - and likely considerably more since.

Estimating the 'leakage' from these retirement funds, they see loan-loss rates typically double that of the average unemployment and estimate up to $37 billion of loan defaults per year. In the 12 months through May 2012, they estimate the 401(k) default rate hit 17.4% - more than double its pre-crisis average and only marginally lower than its peak in 2009.

As they note, many people use the money to pay off other debt or to meet day-to-day expenses, and "Of course, participants are not deliberately defaulting," the study said. "They only do so when they have no other option." As unemployment rates look set to rise, one can only imagine that these 401(k) loan losses, based on their study, are set to rise significantly.

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Tue, 07/17/2012 - 14:29 | 2625107 tmosley
tmosley's picture

And here the government thought there was going to be a bunch of money to steal from our retirement accounts.

SUCKERS!

Tue, 07/17/2012 - 14:41 | 2625153 knukles
knukles's picture

But Paulie "the Unicorn" Krugman would say there's no problem in borrowing from yourself.  Especially sub 1% which shows you to be a great credit to yourself.

It's all bout me,
it's all about me,
it's all about me,
dah dump pah da dump.

Tue, 07/17/2012 - 15:09 | 2625263 Pladizow
Pladizow's picture

So these hard pressed people take a 401k loan and default - how are they then going to then pay the income taxes and potential pre 59 1/2 taxes?

This viscous cycle has a ways to go!

Shit, Im going to start selling 401(k) loan CDS - Im sure there will be no reserve requiresments - so you can trust I'll pay out!

Tue, 07/17/2012 - 15:12 | 2625296 Fukushima Sam
Fukushima Sam's picture

Let's see, I took out a loan on my 401k and bought:

 

  • Gold
  • Guns
  • Bullets
  • Vitamins
  • Water purification
  • Long-term food supplies

I have not defaulted yet (can't do that without losing the job, and apparently I am "too valuable" to lay off) but I would have no regrets in doing so.  The 401k is a status quo scam; I stopped contributing to it when I woke up.  I would have closed it out if I could, but again, without losing the job all you can do is take a loan out on it. 

Tue, 07/17/2012 - 15:19 | 2625347 Pladizow
Pladizow's picture

Check the custodian trust agreement, it may allow for an "in service distribution".

Tue, 07/17/2012 - 15:36 | 2625446 Dr. Richard Head
Dr. Richard Head's picture

Being on the board of my company, I fired myself (due to clause requiring termination for liquidation prior to retirement age) and then rehired myself the next day.  Best fucking termination I have ever had.

Tue, 07/17/2012 - 15:24 | 2625372 SWCroaker
SWCroaker's picture

You can withdraw early; you'd pay taxes (plus a 10% penalty) on the money as income. That's it.

A 10% penalty has not been that much of a deterrant for many...

Tue, 07/17/2012 - 15:49 | 2625542 Frank N. Beans
Frank N. Beans's picture

that's what I thought too; why borrow when you can just withdraw (plus penalty)?  Are there statistics for those who have been withdrawing early rather than borrowing? 

Tue, 07/17/2012 - 18:23 | 2626165 Whiner
Whiner's picture

More exhilarating to borrow: no 10% penalty, no 40% income taxes. Sweet delusion: will pay this back when my salary increases! Good to tap it out w a loan now before those investments managed at 1.9% crash. And be a part of the last great, best bubble. Buy some gold with it and bury it.

Tue, 07/17/2012 - 18:45 | 2626238 swamp
swamp's picture

I know some who cannot withdraw, only borrow.

Tue, 07/17/2012 - 16:27 | 2625738 dhengineer
dhengineer's picture

Never had a 401(k) but I had an IRA.  It increased quite a bit during the crash of 2008 (short both the banks and the S&P), and sold everything at the end of 2009 to buy a little old farmhouse.  Obummer and his merry band were offering their "first-time" buyer's 10 percent credit.  We already owned a house, but the tax credit still applied and since our new place was so cheap, the credit offset about half of the penalty for under 59-1/2 withdrawls.  Then we sold our first place and got our money tax-free.  We paid all of the taxes, the penalties, and we are now debt-free with a paid-up house.

Tue, 07/17/2012 - 16:37 | 2625786 DosZap
DosZap's picture

dhengineer

Just make sure you will be able to pay Property taxes,or all will be gone.

Tue, 07/17/2012 - 15:38 | 2625460 zuuma
zuuma's picture

Amazing!

I found myself in the same boat. Did much the same thing with the money.

No distribution 'till I quit or get fired (plus tax).

Instead, I borrow from myself for the purchase of tangible assets. Now< I'm repaying "myself" at 5% interest on a 5-yr loan.

HAHAHA! If SHTF before 5 years is up --  I have something very substantial. If not, I'm up 5% on the original balance - granted, it's less I have to spend now. So what? I spent it NOW on important stuff.

For me, win/ win.

Tue, 07/17/2012 - 15:54 | 2625572 Dr.Vannostrand
Dr.Vannostrand's picture

Been doing the same here for last couple of years my friend. At 30yrs old, why not? Might as well before we are forced to get .gov paper in there. Just too bad about my PM's and lead-projectice devices, you know, canoes, lakes and all that jazz.

Tue, 07/17/2012 - 16:05 | 2625629 jayc
jayc's picture

I was trying to go over all my early deducation options with our administrator and then I cockily told our Adminstrator that I'll just default on "my" loan and he laughed a bit and told me then they'll just garner my wages! 

Tue, 07/17/2012 - 16:14 | 2625674 Bananamerican
Bananamerican's picture

"he laughed a bit and told me then they'll just garner my wages!"

Must  keep  the ponzi  going....

other than that, it's "your" money.

Tue, 07/17/2012 - 23:17 | 2626835 diesheepledie
diesheepledie's picture

 

 

 

  • Gold
  • Guns
  • Bullets
  • Vitamins
  • Water purification
  • Long-term food supplies
  • Cases of Whiskey
  • Weed

 

Fixed ...

 

Tue, 07/17/2012 - 20:03 | 2626389 ZeroAvatar
ZeroAvatar's picture

Damn! You just HAD to mention 'that' name, didn't ya?   I just micro-vomitted.  (K*****n)

Tue, 07/17/2012 - 14:46 | 2625183 kito
kito's picture

unfortunately, the "suckers are the people who worked, put money aside into these savings vehicles based on govt incentive, and who now find themselves having to borrow, with interest payable to these predatory bastards,  against their very own "savings".....what a system....even peoples "savings" arent theirs................

Tue, 07/17/2012 - 15:10 | 2625288 fonzannoon
fonzannoon's picture

Whats funny (not) is that when people take the loan against their own savings the rate they have to pay back (to themselves) is substantially higher than prevailing rates. The rationale is "hey I may be paying higher rates but I am paying it back to myself". It's not till a few months later when they say "hey I can't afford to pay this back at these rates" and end up getting swallowed up in their own loan. Yet Bernak can raise rates in "15 minutes" if necessary and it won't have any reprecussions.....right?

Tue, 07/17/2012 - 15:37 | 2625457 Dr. Richard Head
Dr. Richard Head's picture

I truly love the "I'm paying myself back" rationale, as well. Makes me giggle and then shit unicorns......wait....I mean skittles.

Tue, 07/17/2012 - 15:52 | 2625561 kito
kito's picture

yes, except they are not borrowing from themselves, they are borrowing from a government/corporate vehicle that needs to stay viable so the house of cards continues to stand.....

Tue, 07/17/2012 - 18:46 | 2626241 Whiner
Whiner's picture

Learn the secret government loophole that let's you borrow 100% of the present value against your future Social Secrity benefits. Get $127,000-$221,000 based on your age. By obtuse Regulation loan is forgiven with no taxe implications if System implodes while loan outstanding. Only a few allocated subscriptions remaining. Send $1250 US fee for detailed report to Dr. Chimera Obamga, Postal Box 666, Dodoo, Nigeria. Refunds guaranteed if not totally satisfied. Legal opinion included by US firm, Cheatim, Cummings and Goeing. Act now! God bless you and your family.

Tue, 07/17/2012 - 16:15 | 2625680 rockraider3
rockraider3's picture

My rate is roughly 4%.  I don't know what the prevailing rates are for a personal loan, but I suspect that it's higher.

The unaffordable component to a 401(k) loan is that they are a 5-year mortgage style amortizing loan, at least in my experience that is all that is offered for my plan. So you are paying interest and principle each pay period.  That clearly makes the payment higher than just interest only or a loan with a longer amortization schedule.

Tue, 07/17/2012 - 16:51 | 2625840 DosZap
DosZap's picture

with interest payable to these predatory bastards,  against their very own "savings".....what a system....even peoples "savings" arent theirs................

If I am not mistaken kito the interest is paid back into THEIR 40k,it's their money.

Tue, 07/17/2012 - 15:50 | 2625551 Larry Dallas
Larry Dallas's picture

No one I know of personally or tangentially has ever successfully retired on a 401(k) or IRA type of defined benefit program. If you know of someone, I suggest you take them out to lunch and ask them how comfortable they feel in a product that yields no cash flow.

It’s all BS.

The only ones who made money were the money managers with their fees and elaborate Frasier Craine-laced bullshit for explaining the types of funds to Middle Americans who were purposely meant to feel dumb so they could trust these clowns.

Although I have no way of corroborating this, I bet if you did a model on this, you’d see that more than 25% (absolute) of your contributions would have gone into fees. Yes, this includes loads, monthly management fees, penalties and etc.

Once this goes, then lending guidelines will be relaxed and folks can use HELOCs to get by. It’s a vicious cycle.

Went into the Citibank branch in the southwest once to deposit a check for 5 figures.

All the sucker alarms must have gone off because all of a sudden a 25 year old punk, ostensibly uncomfortable in a dress shirt and tie that did a poor job of hiding his sleeve and neck tattoo came out and told me about their investment products. What does this asshole know about investment products? I bet he couldn’t even spell “annuity”.

Like sitting through a time share sales presentation, I got up and walked out after I demanded the deposit slip.  

 

Tue, 07/17/2012 - 15:54 | 2625568 fonzannoon
fonzannoon's picture

Larry if the market has returned what....2% a year the last 12 years, and you paid 1.5% in fees then maybe it's not 25% of your contributions that went to fees but rather 70% of your gains.

Tue, 07/17/2012 - 15:51 | 2625554 sessinpo
sessinpo's picture

This is what IRA accounts are for. After all, it is generally blue collar workers and unions that have pensions and 401ks. It is more likely white collar those that have reach financial critical mass to have IRAs. Anything on the books is open for game and changes in tax laws.

What, I thought I would get my dispersement tax free because I paid taxes on it going in. Well, fight the IRS when the rules change. What, I thought retirement was 6# years old. Fight the IRS when the retirement age gets raised to 70+. What I, I'm not getting SS, fight the IRS when they tell you the government is broke. Oh yea, and the government wants to know if you have any PMs stored any where. LOL.

Mon, 09/24/2012 - 06:31 | 2823661 amanda33
amanda33's picture

I have borrowed money from my 401(k) account because it was the fastest way to cover a margin account when the SEC filed a complaint against a company that I had purchased shares of on margin. Had my employment been terminated before I paid off the loan online, the balance of the loan would have been due immediately. I was over 59 1/2 and wouldn't have been subject to Federal income tax penalties. I was lucky.

Tue, 07/17/2012 - 14:30 | 2625112 TheFourthStooge-ing
TheFourthStooge-ing's picture

Fuck it - better to spend it now before Uncle Scam makes a move to grab it.

Tue, 07/17/2012 - 14:45 | 2625169 Thomas
Thomas's picture

It's only about $1000 per taxpayer. On the other hand, the average taxpayer had about $2000 total in retirement!

Tue, 07/17/2012 - 14:45 | 2625176 LawsofPhysics
LawsofPhysics's picture

Correct, apparently many americans have already "gone greek".  This should end well.

Tue, 07/17/2012 - 16:35 | 2625779 DosZap
DosZap's picture

Defaulting on your own 401k loan is the only way most can GET IT OUT, before its seized.

Smart moves.............just bank it,in something of value, and under your control.

Tue, 07/17/2012 - 19:07 | 2626290 pacu44
pacu44's picture

not that it matters, but it defaulting on your 401k loan is not recorded on your credit score...

Tue, 07/17/2012 - 14:30 | 2625115 ImNotARobot
ImNotARobot's picture

Could this be the reason they use to "nationalize" our 401k plans and finally steal everything we have?  They never let a good crisis go to waste after all...

Tue, 07/17/2012 - 14:33 | 2625118 Daily Bail
Daily Bail's picture

 

 

From Bloomberg earlier today.  Major kudos to the segment producer for creating a truly beautiful moment as Emperor Warren appears naked in front of millions.  By the way, Becky Quick's favorite Uncle Warren claims to drink 5 Cherry Cokes per day.

HILARIOUS - Warren Buffett Fails The Cherry Coke Taste Test LIVE On Bloomberg TV

 

 

Tue, 07/17/2012 - 14:36 | 2625138 Clueless Economist
Clueless Economist's picture

My Good God No!  The thoughts of Elizabeth Warren naked are too much for me to deal with.

Tue, 07/17/2012 - 20:14 | 2626423 ZeroAvatar
ZeroAvatar's picture

I hear you!  The thought of UghmanTM  alone is too much for me to deal with.

Tue, 07/17/2012 - 14:42 | 2625155 azzhatter
azzhatter's picture

like everything else about this guy- a phony

Tue, 07/17/2012 - 20:16 | 2626433 TheFourthStooge-ing
TheFourthStooge-ing's picture

I'm surprised that after tasting all four samples the old goat could even remember what they were doing.

Tue, 07/17/2012 - 14:46 | 2625181 Winston of Oceania
Winston of Oceania's picture

I once saw him giving a walking interview while eating what looked like ensure on a stick. Disgusting spectacle...

Tue, 07/17/2012 - 14:56 | 2625236 Hype Alert
Hype Alert's picture

5 Cherry Cokes per day!  Doesn't that exceed Bloomberg's soda ban?

Tue, 07/17/2012 - 15:43 | 2625496 Bicycle Repairman
Bicycle Repairman's picture

Maybe Warren's coke doesn't contain corn fructose.  He may go with the healthier, acceptable, choice: aspartame.  LOL.

Tue, 07/17/2012 - 15:54 | 2625573 sessinpo
sessinpo's picture

It's pure Columbian coke with a hint of cherry. It helps her deal with her high cheek bones she inherited from her Indian ancestors

Tue, 07/17/2012 - 15:41 | 2625479 Bicycle Repairman
Bicycle Repairman's picture

Two of the four were Coke products, so the sample was rigged in his favor. 

In the end, he misunderstood the question.  He didn't answer "Which one is Cherry Coke?"  He answered "Which do you prefer?"  He, quite logically, chose Doc Pepper.

Tue, 07/17/2012 - 14:32 | 2625123 Boilermaker
Boilermaker's picture

Yea, this is a real worry.

Tue, 07/17/2012 - 14:34 | 2625130 ReallySparky
ReallySparky's picture

What are the tax implications for the individuals that default and do not pay the 401K loans?

Tue, 07/17/2012 - 14:37 | 2625141 Chump
Chump's picture

It's treated as a disbursement meaning the account holder is on the hook for income taxes and an early withdrawal penalty.  I think it comes to approximately 40% of the total amount withdrawn depending on your tax rate.

Tue, 07/17/2012 - 14:38 | 2625144 The Gooch
The Gooch's picture

If they write it off, you will be served a w-2 (or something) as it is now "EARNED INCOME"

on your part.

Tue, 07/17/2012 - 20:55 | 2626533 BooMushroom
BooMushroom's picture

...and then you are retroactively considered "employed" for the whole year. Bullish!

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