401(k) Loans Grow as Participants Struggle with Emergency Savings

T. Rowe Price 401(k) loans

Image Credit: © Towfiqu | Dreamstime.com

While 401(k) loans have increased since their low during the COVID-19 crisis in 2020, they have yet to reach pre-pandemic levels.New findings from T. Rowe Price report that while the current percentage of participants taking 401(k) loans increased across all age groups, average loan amounts decreased from 2022 to 2023 among all cohorts expect for participants between the ages of 50 to 59, who also had the highest loan balances.

When surveyed on deferral rates, T. Rowe Price found that participants who take 401(k) loans or hardship withdrawals were two times less likely to use the automatic escalation services that increase their rates each year.

Still, participants have steadily allocated towards their retirement so far in 2023, with T. Rowe Price reporting an average deferral rate of 8.5% in the first six months.

Low emergency savings

The findings come as more participants struggle with saving towards emergencies. Seventy percent of T. Rowe Price survey participants say they haven’t saved six months’ worth of expenses for an emergency, while 46% report having less than $1,000 saved for unexpected expenses, citing credit card debt, mortgage payments, and car payments as the top three reasons as to why they can’t save.

Improved participant engagement

Despite facing headwinds with emergency savings and 401(k) loans, T. Rowe Price data shows a higher rate of participants are engaging with personalized communication strategies geared toward retirement planning, budgeting, and maximizing 401(k) plans.

“Participants need more education to continue improving financial health by balancing competing priorities, like debt and emergencies, with retirement savings.”

Rachel Weker, T. Rowe Price

Specifically, T. Rowe Price found that participants were five times more likely to seek additional resources and two times more likely to increase their deferral rate after watching a personalized educational video.

The findings towards improvements in financial education are promising, say T. Rowe Price experts, even if there is more work to be done.

“While we are encouraged to see participants continuing to maintain savings levels and take advantage of personalized education, people need help addressing debt, emergencies, and overall financial health” said Rachel Weker, senior retirement strategist for Retirement Plan Services at T. Rowe Price, in a statement. “Participants need more education to continue improving financial health by balancing competing priorities, like debt and emergencies, with retirement savings.”

Other key findings

Additional findings from T. Rowe Price include:

SEE ALSO:

Exit mobile version