The gulf between the media’s portrayal of the economy and the reality on Main Street widened a bit more recently when Fidelity Investments reported that the number of Americans raiding their retirement savings to keep up with bills increased. According to the report, the number of hardship withdrawals in the last 12 months increased from 2.0% to 2.2% over the prior year – an increase of 10%. The people doing this are obviously desperate enough to stick themselves with the significant taxes and penalties that result from early withdrawals. At the same time, the number of people with loans outstanding on their 401K accounts increased to a record 22% in the second quarter. The top reasons cited for taking the loans were to “prevent foreclosure or eviction, pay for college, or purchase a home”, reported CNN.com. The sad thing is that many of the people borrowing from their retirement savings to prevent foreclosure will probably lose their homes anyway – and still be stuck with having to pay back their retirement accounts.
This is a troubling trend. Americans in general already are woefully underfunded for their retirements, and with Social Security highly uncertain, the golden years may end up being anything but golden for many.
Tyler Durden over at ZeroHedge makes an interesting point regarding the implications of these withdrawals for Fidelity and similar companies:
And if anyone is so deluded to think that these not so gracious retirees have any intention of ever paying these “loans” back, we have some AJ-rated CMBS to sell you at par prime. Which also means that suddenly Fidelity may find itself with worthless liens instead of cash, and should the market plunge again and the fund giant find itself in a need to satisfy billions in collateral calls, it is game over.
With loans outstanding on 22% of Fidelity’s retirement accounts, what happens if the market drops over the coming months and the values of leveraged accounts begin to drop below the outstanding loan balances? Fidelity could have a serious margin call on its hands with little recourse.
-CH
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