Senate bill would limit 401k loans
The bipartisan proposal would make borrowing harder but repayment easier.
This post comes from Emily Brandon at partner site U.S. News & World Report.
A new bill aims to make it more difficult for workers to take out 401k loans, but easier to pay them back. U.S. Sens. Herb Kohl, a Wisconsin Democrat, and Mike Enzi, a Wyoming Republican, introduced a bill on May 18 with provisions intended to prevent the leakage of savings from 401ks before retirement.
Reduce early access. The Savings Enhancement by Alleviating Leakage in 401k Savings Act of 2011, or SEAL Act, reduces the number of loans that 401k participants can take to three at a time. Currently employers determine the number of loans available.
- Run the numbers:How much will your 401k provide?
"While having access to a loan in an emergency is an important feature for many participants, a 401k savings account should not be used as a piggy bank," says Kohl. "As the frequency of retirement fund loans have gone up, the amount of money people are saving for their retirement has gone down." The legislation also bans products that actively encourage 401k participants to tap into their savings before retirement, such as a debit card linked to a 401k account.
This legislation wouldn't prevent most 401k participants from accessing their money. The typical individual with a 401k loan had only one (69%) or two (29%) loans outstanding in 2010, according to an Aon Hewitt analysis of 110 large 401k plans with 1.8 million employees released this week. Only 2.5 percent of people who borrowed from their retirement account last year had more than two loans simultaneously.
Longer loan repayment period. Repayment of 401k loans would get easier under the new legislation. Employees with 401k loans who lose their jobs generally must repay the entire outstanding balance of the loan within 60 days of job termination. Any amount not repaid is considered a 401k withdrawal and the account holder incurs tax penalties and, if under age 59½, a 10% early withdrawal penalty. Nearly 70 percent of employees with 401k loans who lose their jobs default on the repayment and must pay the penalties, compared to 3% of continuously employed individuals who default on their loans, Aon Hewitt found. Post continues after video.
The SEAL Act would give employees until their tax deadline that year to contribute the outstanding loan balance to an IRA before income tax and the early withdrawal penalty would be applied to the loan balance.
"Our bill would allow for a greater period of time for the loan to be paid back, thereby helping families pay back the loan and allowing the funds to be put back into their retirement savings," says Enzi.
Eliminate contribution restrictions. The bill would also allow 401k participants to continue to make contributions during the six months following a hardship withdrawal. Employees are currently prohibited from contributing to a 401k for six months after a 401k hardship withdrawal, which causes workers to miss out on any 401k match offered and discourages continued saving for retirement. Hardship withdrawals, which were for an average of $5,510 in 2010, are most often taken to avoid a home eviction or foreclosure or to pay for medical or education expenses.
401k loans are common among retirement savers, especially among individuals in their 40s and those earning between $40,000 and $60,000 annually. Approximately 28% of 401k participants had an outstanding loan in 2010, up from 22 percent in 2005, Aon Hewitt found. The average loan was $7,860, which represented 21% of these participants' total retirement assets. Most 401k participants with a loan continue to save in the 401k plan (82%), but their average savings rate (6.2% of pay) is lower than those who do not have a loan outstanding (8.1% of pay).
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I am sure most employees don't want to borrow from their 401k however it is their money..
I am also pretty sure a monkey could figure out that 401k loans have increased since 2005 after what happened in 2008
The IRS has enough rules in place for 401k plan administration along with testing and most employers do not allow three loans at the same time so this is a lame point. Hardship loans are just that and should be allowed since it is your money.. If you want employees to save more and borrow less then focus on lowering the cost of health insurance, homeowners insurance and car insurance.
When we first chose to invest in a 401k plan, we were presented with a booklet. I still have it, it explains how we could draw funds out for a home purchase, higher education, medical bills, etc. It explains that depending on the circumstances and the amount we want to draw out, we may or may not have to pay a 10% penalty.
In 2008 when my husband had undiagnosed health problems, he was put on indefinite leave from work. The increased amount of bills was much greater than the disability pay (80% of base pay).
After only a few months and with no hope for improved health, we chose to contact T.Rowe Price and request to make a withdrawal from his 401k. We were told we could only borrow the funds.
Since we did not have enough to pay our current monthly bills, I knew that we could not afford a loan.
We decided to stop investing at that point. As soon as we were in a position to afford it, we did borrow against that fund. It is our current decision to never make another contribution and keep as much as possible borrowed from the fund.
Why should the company my husband works for have access to our money, when we were forced into a great amount of debt 3 years ago that we still have not recovered from. Each time we borrow, we pay something else down.
How dare our government change the rules and make that apply to money we previously paid in on a much different agreement.
Oh yeah, that's definately what will happen. 401k's will be the new Social Security and they will be at the mercy of the government.
I work for the USPS and everyone knows about us having to prefund retirement benefits to the tune of almost $6 billion every year. What I want to know is where is the money? It's in some government controlled account that was "earmarked" by congress as money that can be used as a "loan". The account is nearly empty right now... guaranteed!
Think about it; where does the money you put in your 401K go? It goes to investment banks. If people are taking money out of their 401K, then they are taking money out of the banks. That is denying the banks additional profits and financial leverage for their business dealings. The law also makes it easier for people to put their money back into the system. This isn't a favor to the investor (although they will frame it that way). This is so banks have a higher likelihood of getting more of your cash back in their hands.
The 401K is one of the greatest financial shams in history. Don't get me wrong, it isn't that investing is evil or fraudulent. The issue is how they frame 401K's. 401K's are not savings accounts. They are investment instruments. Senator Kohl, in his own retarded way, is right. 401K's are not piggy banks. Piggy Banks are actually for saving and then using as you need (which Senator Kohl apparently doesn't understand). 401K's are dynamic financial tools that carry an amount of risk. Unfortunately, the public has been conditioned to think of 401K's as savings accounts. The 2 Senators further this misleading position by clouding the reality with statements that imply a 401K is for retirement as though the return is a certainty. Ask people who have retired since 2007 how stable a 401K account has been for their post career lives. A 401K is no different than any other investment tool. There isn't a certainty that you will realize a return and your money is no "safe" despite what you may be led to believe. Savings accounts are the only thing that are actually savings accounts. You could go with bonds or some other low risk endeavor as well. The 401K is commonly used to purchase stock though. Thus, it is a gamble. Try not to let them convince you otherwise.
The biggest scam in all of this is that there is any penalty associated with taking money out of a 401K "early" versus at the end. The tax penalty likely exists only to keep more working class money in the stock markets. They are using middle class retirement funds to fatten the stock prices by injecting more capital into the system. If one takes money out of their 401K, why not just tax it at the rate that it would have been taxed during the year the contribution was made? It is just one more way for the wealthy and banks to get more of your money. At least there is something in it for you though (as long as the investment generates a return).
And for the record, I do invest and have a 401K. I am definitely not against it. I think it is a risk worth taking and will be a net positive in the long run. However, I am completely aware of the risk and what I am getting myself into when I deposit into my 401K. I simply do not like the misleading nature of politicians and how 401K's are sold like there is some magical guarantee of a return.
A 401K is our money and we should be able to use it if we want to. A lot of times, a person starts working for a company late in life and will only work 5 or 10 years and while there might be a 401K, it will never be a retirement unless you can live on 50 bucks a month, so why should these people not be able to access their 401K's when and how they want to.
The politicos will get around to taking all retirement funds for themselves in our lifetime. That's ALL, folks, not some. They looted social security, they looted medicare, and they've got the economy set up so very few people can now own homes.
They've got things going their way. Knife everyone with white gloves.
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