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Savers tap 401(k)s at higher rate

SAN FRANCISCO — Even as retirement savers recoup some investment losses from a year ago, financial struggles are forcing more of them to take out loans and hardship withdrawals from their 401(k) plans, according to data released Friday from Fidelity Investments.

In the second quarter, 11.1 percent of 401(k) savers who actively participate in their plan took out loans, the highest level in 10 years, according to Fidelity's study of 11 million participants in 17,000 workplace plans.

The last time the number approached that level was in the second quarter of 2004, when 10.7 percent of participants took loans, and the second quarter of 2009, when 9.2 percent did so.

Meanwhile, 2.2 percent of active participants took a hardship withdrawal, up from 2 percent a year ago. All told, 62,000 active participants tapped their accounts through a hardship withdrawal in the second quarter, 17,000 more than did so in the first quarter. Forty-five percent of the people who took a hardship withdrawal did so two years in a row, Fidelity said.

The average age of people who took a loan or withdrawal is between 35 and 55. For loans, the average initial amount borrowed was $8,650, the study said.

Hardship withdrawals are offered in the event of immediate and heavy financial need; participants are required to demonstrate proof of hardship. Top reasons for taking withdrawals include preventing foreclosure or eviction, paying for college or purchasing a primary residence. Other reasons include medical expenses, funeral costs or paying for damage to a primary residence.

"A lot of individuals are recognizing that they have nowhere else to turn, so they have to look to their retirement accounts," said Beth McHugh, vice president of market insights at Fidelity. "People are still struggling to manage their day-to-day financing."

McHugh attributed the increase in loan participants to a rise in unemployment. "People are looking to their 401(k)s," she said. "For many people, this is their only option, because it's their only form of savings."

The average 401(k) account balance for the second quarter of 2010 was $61,800, down slightly from the first quarter, but up 15 percent from a year ago, indicating that investors have recouped some losses from the recession.

The average deferral rate, which measures the percent of investors' salaries that is contributed to their 401(k) plan, has held steady at about 8 percent since the first quarter of 2009. About one-third of participants deferred at a 10 percent rate or higher.

"Importantly, we're seeing people dip their toes back in the market," McHugh said.

Savers tap 401(k)s at higher rate 08/20/10 [Last modified: Friday, August 20, 2010 9:03pm]
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