First, people raided their home equity.  Now, it seems they are raiding their 401(k) retirement accounts.  I'm going to guess when those run out, they will turn to credit cards.  Why not just cut your expenses?  For the rare case - a sick child or spouse - that isn't possible but wouldn't you rather sell the car and ride a bike than end up broke during retirement?  Apparently not.

The big news over the past few days seems to be that Fidelity, one of the largest 401(k) plan service providers for businesses in the United States, announced three startling facts:

• The portion of 401(k) account holders taking a loan out against their 401(k) plan grew from 9% last year to 11% today.
• The total percentage of 401(k) account owners who had taken out a loan against their plan grew to 22%. This is the highest figure in a decade.
• The average 401(k) account balance has grown by 15% over the prior year to $61,800.

What To Make of These 401(k) Figures

Clearly, we should be concerned about the spike in 401(k) loans and hardship withdrawals.  If an employer's plan permits 401(k) loans, you can take out loans against your retirement plans but you must repay them with interest within a set time frame or else the IRS treats it like a withdrawal.  That means you will be forced to pay income tax on the money you took out of your account, as if it had been a regular paycheck, plus you will probably owe an additional 10% penalty!

If you're lucky, you'll be left with 50 or 60 cents for every $1 you had in the account!  (For more information on this, read about 401(k) hardship withdrawals and 401(k) loans).

That is not to say that taking a 401(k) loan is always a bad thing.  In fact, someone who is financially sophisticated could use his or her own 401(k) as a funding source to, say, come up with the down payment on an apartment building if they were interested in investing in real estate.  With prices much lower than they were a few years ago, such a move by a savvy investor could be very smart in the long-run even though it tapped his or her resources over the next twelve months.  If there were very little doubt the money could be repaid, a 401(k) loan may be the ideal solution.  But those types of scenarios are rare and only count when you're dealing with someone who understands all of the risks and dangers of such a move.

On the other hand, the average 401(k) account balance is up 15% year-over-year.  That means for those who are living below their means, paying cash and avoiding debt, their net worth continues to grow and compound steadily thanks to reinvested dividends and interest income.  Factor in the matching money most companies offer on retirement contributions and it isn't hard to see how the average investor is still doing well despite the fact that the newspaper headlines would indicate otherwise.

The Average Guy Is Still Doing Just Fine ... But No One Wants to Hear This

The truth is, the boring school teacher in Indiana or the mechanic in Baltimore who pays his bills and keeps dollar cost averaging is doing just fine because when the market hit bottom a year or so ago, all of his contributions bought far more shares.  I wrote about these types of people in How to Avoid Financial Stress.

Common sense tells you this; it was only 18 months ago that GE was at $6, U.S. Bancorp was at $8, Wells Fargo was at $10, American Express was at $10 ... the list goes on for hundreds, if not thousands, of stocks.  Many of those are up between 100% and 400% from their bottom lows so someone putting away money each month benefited because those low prices bought them far more shares, lowering their weighted average cost basis.  That is why good financial planners warn their clients to invest over time and not dump lump sums of money in the stock market or other investments.

What Will This Mean for Society?

What concerns me as a citizens is the growing social strains that will result from people taking 401(k) hardship withdrawals and loans.  When the significant minority has depleted their assets, finds they can't live on Social Security, and wake up the first morning of retirement with no savings, the odds are good they are going to blame the rich (read: those who saved money) and the professionals (read: those who are still working and doing okay such as nurses, attorneys, etc.), for their misfortunes.

If this were to lead to increased demands for a welfare state in twenty years, I think you could have significant social unrest and upheaval.  This was avoided a generation ago due to pension plans.  Under that system, the employer saved on behalf of the employee, who was unaware of stock market crashes because a pension fund asset manager took care of the details.  The professionals weren't losing sleep at night, unlike the neophyte investor who doesn't understand what stocks are let alone the reasons they keep fluctuating.

Perhaps more importantly, under a pension system, the employee couldn't tap into his or her pension assets when things got tough.  That may have meant he or she went bankrupt sooner if things went poorly but there were never in danger of starving in retirement because most courts protect the pension checks received by retirees.