401(k) Loans Surge While Emergency Savings Dwindle

A newly published report by global investment leader T. Rowe Price, has raised alarms about rising 401(k) loans and an alarming dip in emergency savings.

Key findings

• Worrying Savings Trends: 70% of participants have failed to save six months’ worth of emergency expenses. Disturbingly, 46% have less than $1,000 saved for unexpected costs. Participants cited rising credit card debt, mortgage payments, and car payments as the top three reasons for an inability to save.
• Reasons for Low Savings: Participants blamed escalating credit card debt, mortgage, and car payments for their inability to save.
• 401(k) Loan Insights: Loan upticks were observed across all age brackets. However, individuals between 50-59 years emerged as the largest borrowers, holding the highest loan balances. Loans have consistently increased since a low in 2020.
• Savings Rate: Even with inflation, participants maintained an average deferral rate of 8.5%.
• Digital Engagement Grows: 2023 has seen increased consumption of digital retirement planning content. Particularly, educational videos about financial wellness have been a hit.

A crucial highlight of the study, which was based on the company’s analysis of its retirement-plan customers, points to participants who invest wholly in a target-date product. They are 24 times more prone to remain committed to their investment. Also, participants who took a loan or a hardship withdrawal were two times less inclined to opt for auto-increases. Furthermore, a mere 13% of participants make catch-up contributions when they hit 50.

Rachel Weker, a senior retirement strategist for Retirement Plan Services at T. Rowe Price, noted the positive trend of participants maintaining savings levels and utilizing personalized education. However, she emphasized the need for better financial education to juggle urgent needs like debt and emergencies without sidelining retirement savings.

The study also 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.

1. Rowe Price had $1.4 trillion in assets under management as of August 31, 2023.