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.