How can a 401(k) loan insurance program improve results?
The impact of 401(k) loan defaults on retirement savings can be significant, but new research from EBRI shows that automatically enrolling participants in a 401(k) loan insurance program (k) can help reduce payment defaults and improve results.
While Department of Labor data as a whole indicates that loan amounts tend to represent a negligible portion of total plan assets, previous EBRI research has shown that loan default by the pension plan can result in significant reductions in pension balances. In its latest briefing note – The Impact of Adding an Automatically Enrolled Loan Protection Program to 401(k) Plans – EBRI Simulates the Potential Impact of Adding a Loan Protection Program automatically enrolled in 401(k) plans.
According to the analysis, such an approach can measurably improve retirement outcomes for individuals simulated as having at least one default. EBRI found that preventing system leaks through the use of loan insurance over a 40-year period results in an increase in 401(k) present value and a rollover of IRA balances by 1, $96. trillion.
This can go a long way in reducing the present value of U.S. household pension deficits, as EBRI’s Retirement Security Projection Model (RSPM) shows that the aggregate pension deficit for all U.S. households aged 35 at age 64 as of Jan. 1, 2020, was $3.68 trillion, according to the Brief Notes.
And while the cost of the program reduces account balances for those with a loan, EBRI notes that the combined 401(k) and IRA account balances at age 65 for 401(k) participants simulated a loan default. in the baseline. scenario will be increased by:
- retention of the account balance that would otherwise be in default; and
- retention of the remaining amount of the account balance for participants who have been simulated to be in default on their loan.
According to EBRI projections, the average increase in the present value of the plan balance derived from a loan protection program based on the current age of the 401(k) participant is as follows:
- 25 to 34 years old: $150,623
- 35 to 44 years old: $184,681
- 45 to 54 years old: $194,529
- 55 to 64: $195,692
Since average account balances increase monotonically with age, this would lead one to expect the present value to be higher for the older cohort, the brief grades. “This is offset to some extent by the fact that members of younger cohorts would have a higher likelihood of multiple default events than those currently in older cohorts, because they have more years of exposure. to a potential default in payment,” the brief continues. highlighted.
Plan Loan Landscape
As for the overall breadth of loan plans, the EBRI/ICI 401(k) database shows that 88% of participants were in plans offering loans; however, only 19% of those eligible for loans had outstanding 401(k) plan loans. As expected, loan activity varies by age, seniority, and account balance. Among participants in plans offering loans, the highest percentages of participants with outstanding loan balances were among participants in their 30s, 40s and 50s.
Considering all 401(k) participants with and without access to loans in the database, 17% had loans outstanding at the end of 2018. Of participants with 401(k) loans outstanding at the end of 2018, At the end of 2018, the average outstanding loan balance was $8,162, compared to $7,935 in the 2017 year-end database. The median outstanding loan balance was $4,486 at the end of 2018 , compared to $4,293 in the database at the end of 2017.
EBRI further observes that on average over the past 23 years, among participants with outstanding loans, approximately 13% of the remaining account balance remained unpaid. Additionally, a Deloitte study, based on anecdotal data from archivists, estimates that 66% of participants who defaulted on their loan took their entire account balance.