Tax-deferred retirement accounts offer participants loans and withdrawals as a way to attract participants. According to new research by Vanguard, which studied seven large defined contribution plans for the 12-month period ending June 30, 2010, blacks and Hispanics were more likely to take a loan or hardship withdrawal than whites or Asians. Even though they were more likely to take advantage of these services, the fraction of savings “at risk” through loans was only slightly higher for blacks and Hispanics and, in the case of hardship withdrawals, was actually lower for blacks.
Seventeen percent of active participants accessed plan savings through either loans or hardship withdrawals in the 12-month period ending June 30, 2010. Twelve percent of active participants took one or more loans, 4 percent took one or more hardship withdrawals, and 1 percent took both.
Vanguard found that blacks were 55 percent more likely to take a loan than whites or Asians. Hispanics were about one-third more likely to take a loan. Black and Hispanic participants borrowed only a slightly higher fraction of their retirement account balance, and there was no meaningful difference in 12-month loan default rates among groups. This higher incidence of loans among blacks and Hispanics occurs after controlling for income, account balance, and other demographic differences.
About 5 percent of participants in the study took hardship withdrawals. Within this group, blacks were almost twice as likely to take a withdrawal as whites. However, they withdrew a smaller fraction of their account balance.
“These finding may also reflect other unobservable characteristics, such as differences in financial literacy, trust in financial institutions, or constrained access to credit outside the plan. For sponsors concerned about participants borrowing from retirement savings, one plan design strategy is to consider limiting participants to one loan outstanding or other modest borrowing restrictions,” the report stated. “This strategy appears to reduce borrowing levels across all participants and all racial and ethnic groups.”