401(k) plans aren’t just for retirement

By Felix Salmon
August 20, 2010

One of the reasons that banks made so much money from overdraft fees is that people are naturally optimistic: they never think, when they open a checking account, that they’re going to go overdrawn very often. So overdraft fees aren’t a big deal to them at the time.

Much the same is true of retirement accounts like 401(k) plans. People load them up with stock-market investments, because they’re not going to touch the money until they retire, which is a long way off, and stocks tend to perform well over the long run. Financial advisers, similarly, tend to recommend stocks for the long run — and there’s nothing more long-run, for most people, than their 401(k) account.

Except in the real world it doesn’t work like that: Fidelity has just announced that by the end of the second quarter, 22% of its 401(k) participants had borrowed against their accounts. That’s about 2.5 million Americans right there:

“People have been looking to their 401(k) plans as a source of relief to help them meet financial hardships,” said Beth McHugh, a Fidelity vice president who oversees the area. “For many individuals that is their primary savings vehicle.”

The point here is that if your 401(k) plan is a savings vehicle which you’re going to use to help meet financial hardships, your risk appetite and asset allocation decisions are likely to be very different from what your financial adviser is probably telling you.

Even if you just take into account a 22% probability that you’ll need to tap your 401(k) before retirement, that should probably reduce the degree to which it’s invested in stocks. And that probability is low: 22% of Fidelity’s 401(k) plans have loans out against them right now. The number of the company’s plans which have ever had loans out against them is by definition substantially higher.

Very few people are so well off that they can be certain they’ll never need to tap their retirement funds before retirement. The rest of us should be a bit more realistic about that possibility, and invest accordingly.

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