Vanguard DC Plans See Hike In Hardship Withdrawals

While recognizing a significant year-over-year uptick in defined contribution participants taking hardship withdrawals, a new Vanguard Group research report said the trend occurred in only a fraction of the company’s total recordkeeping assets.

Authors William E. Nessmith and Stephen P. Utkus of the Vanguard Center for Retirement Research said the withdrawals from plans for which the company provides recordkeeping services shot up approximately 17% in 2006 and 9% in 2007 after normalizing for overall growth in Vanguard’s participant base. December 2007 hardship withdrawals were up 22% from a year earlier, Vanguard said.

The dollar amount of such withdrawals also rose, according to Vanguard data, with the average 2006 withdrawal at $6,811, up 15% from 2005. Meanwhile, the average 2007 withdrawal of $6,194 was down 10% from the 2006 level, but still up about 5% from 2005.

The report says that the absolute level of withdrawals remains “quite low,” with 1.5% of accounts recording a 2007 hardship withdrawal. Meanwhile, the total dollar amount of all hardship withdrawals represented about one-tenth of 1% of total recordkeeping assets at Vanguard in 2007.

The hardship withdrawal data is also affected by what the researchers said was a seasonal trend with such transactions typically peaking in July or August—a development they suggested might be connected to tuition expenses. According to the report, some observers have linked the withdrawal trend to financial stresses on households with shaky finances related to the nation’s housing crisis.

However, considering the major spike in the Vanguard data coming in 2006, the researchers noted that the “other possibility is that the rise in hardship withdrawals is less a direct fallout of the mortgage crisis, and instead, an early warning sign of general economic stress among financially constrained households. This explanation seems more likely, given the actual timing of the increase in withdrawals.”

The report is available here.