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Americans borrow heavily from 401(k)s but loan defaults are up

The default rate on 401(k) loans hit 17.4% in the 12 months through May, compared with 9.7% in mid-2008, before the financial crisis.

July 17, 2012|By Walter Hamilton, Los Angeles Times

Americans are borrowing huge amounts of money from their 401(k) retirement plans — and then having big trouble paying off their debt, according to a new study.

Defaults on 401(k) loans have totaled as much as $37 billion a year in recent years, far higher than previously estimated, according to the analysis Monday by two researchers.

The default rate hit 17.4% in the 12 months through May. That's down slightly from the 19.8% peak in mid-2010, but up dramatically from 9.7% in mid-2008, before the global financial crisis.

The study was written by Robert Litan, a researcher at the Ewing Marion Kauffman Foundation and the Brookings Institution, and Hal Singer, a managing director at Navigant Economics.

The study shines a spotlight on the severe financial duress that many Americans are suffering in the troubled U.S. economy.

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 study said. Americans had borrowed a collective $105 billion from their 401(k) accounts as of 2009.

Defaults often are triggered by financial setbacks such as illness or job loss, and many people use the money to pay off other debt or to meet day-to-day expenses.

"Of course, participants are not deliberately defaulting," the study said. "They only do so when they have no other option."

People who default on their loans get hit with a triple whammy. Aside from depleting their retirement accounts, they incur taxes on their borrowings and additional penalties of about 10%.

walter.hamilton@latimes.com

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