Picking up on the HelloWallet study showing how participants are tapping their 401(k) plans to pay bills, Time magazine this week raised the question of the effectiveness of the system. Though the concerns are real — with one quarter of workers planning to use their 401(k) plans for current expenses and an estimated $70 billion in leakage in 2010 — questioning a system that has attracted so many people and so much assets seems like throwing out the baby with the bath water.
According to the HelloWallet study, participants are spending 40% of the money they put away, either through loans, withdrawals or cash-outs. People in their 40s were particularly vulnerable, perhaps because of the housing mortgage burdens created during the real estate boom and bust. Fidelity noted that 22% of participants had loans in 2010 with a high default rate, but that seemed to level off recently, according to EBRI. Innovations like default insurance on loans probably make more sense than creating an entirely new system that may fix some current problems but will inevitably create new ones.
