401k Insurance

Posted by Michael • July 31, 2012

And no, it’s not the kind you think.

Time: 401k Loan Defaults Soar; Insurance Needed?

Obviously, where government and financial services are concerned, you can never have too much graft in the system. Thus our nation’s Smartest Finger Waggers have determined that the time has come to protect our 401(k) plans not from Wall Street, nor from shady CEOs … but from ourselves.

This, of course, will cost money.

As Time tells us, because so many folks take loans against their 401(k)s and then later default on those loans, we SIMPLY MUST DO SOMETHING to stem the tide — nay, the FLOOD — of money “leaking” from professionally-managed, employer-sponsored retirement saving plans.

…Fidelity found in 2010 that a record 22% of 401(k) plans had a loan outstanding. That’s not as bad as it may sound because most loans get paid back. But the default rate on these loans has skyrocketed since the recession; today defaults result in annual 401(k) plan leakage of up to $37 billion . . ..

Well, heavens-to-Betsy! Thirty-seven billion dollars? Why, this sounds like a great opportunity to introduce more “loan insurance” into the system!

Now comes a proposal that workers be asked to purchase insurance against involuntary default before they are allowed to borrow from their 401(k). The insurance would work a lot like private mortgage insurance, which some banks require of some borrowers before extending a home loan. This policy would guarantee that any outstanding loan against 401(k) savings would be repaid if the loan goes into default due to job loss through death, disability or termination.

We’re told that presumably, such “insurance” would be paid for by only those who borrow against their 401(k) plans, and not the rest of us. Color me skeptical. When a new opportunity to skim fees from the masses pops up, you can bet the “safety” it provides will cost a bundle, cumulatively … and they’ll be sure to spread that cost over as many ~~hapless marks~~ investors as possible.

2 Responses to "Next Up: 401(k) Insurance" ...

On August 23, 2012 @ 2:46 pm,
David wrote:

#1

I couldn’t agree more with your skepticism. Private Mortgage Insurance (PMI) really didn’t help out with the mortgage fiasco so why would this be any different
On September 1, 2012 @ 2:13 pm,
Captain wrote:

#2

We live in a borrowing-mentality, insurance-crazed world. What’s next, wallet insurance?

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