WEB: www.washingtonpost.com/wp-dyn/content/article/2008/09/01/AR2008090102999.html

Six months ago, Ivan Sanchez was optimistic about his future. He had recently earned a bachelor's degree in business management and was writing a book about growing up among gangs and guns in the Bronx.

Then he was threatened by something else: a credit card bill, student and car loan debt, higher gas bills and rising rent. With two high school age children in need of clothing and school supplies and a toddler in need of much more, it didn't take very long for Sanchez's optimism to fade. That's when he decided to do what any financial planner would advise against: He dipped into his 401(k) retirement plan.

"There's no other way I could do it," said Sanchez, a 35-year-old Virginia Beach resident.

Hard economic times are driving some people to take actions that could jeopardize their futures. With home equity lines of credit and other types of loans harder to get, employees are increasingly raiding their retirement plans to take care of immediate needs such as paying down debt and medical bills, staving off foreclosure, or simply covering higher food and fuel prices.

"People are overextended in their personal financial lives and are looking for any way to find money to help them weather the storm they are going through right now," said Andrew McIlhenny, executive vice president and co-funder of Firstrust Financial Resources, a wealth management firm in Philadelphia.

There are two ways people tap into their nest eggs. They can take hardship withdrawals, which require proof of a severe financial need. Or they can get a loan, which they have to pay back, usually within five years. Not all employers will permit either one, but those who do impose different rules and fees. One thing is the same, however: Taking a withdrawal or loan can have a long-term negative impact, advisers and plan providers said.

The pickup in withdrawals is a worrisome trend because 401(k) plans are replacing employer-sponsored pension plans and Social Security as the main source of retirement savings for many Americans, financial advisers and plan administrators said. Over the past two decades, as participation in 401(k) plans has quadrupled, politicians and employers have urged Americans to treat them as sacred. Yet some banks have started offering debit cards linked to accounts with money from 401(k) loans.

"With the increase in credit card debt, with the increase in plan holders and the availability of borrowing against a 401(k), I think that society is starting to view it as more than a retirement plan, but as kind of like an alternative way to get cash," said Pamela Villarreal, senior policy analyst for the National Center for Policy Analysis in Dallas.

Some of the nation's largest 401(k)-plan administrators have reported increases in hardship withdrawals. At T. Rowe Price, withdrawals were up 19 percent in June compared with the same period last year. At Vanguard, they increased 8.6 percent in 2007 from the year before.

Hewitt Associates, an Illinois-based human resources consulting company that tracks 401(k) trends across the country, found that 5.4 percent of plan participants took hardship withdrawals in 2007, up from 4.9 percent the previous year. That followed several years of declines after a peak of 6.2 percent during the 2002 recession.

To make such withdrawals, employees have to prove that they need the money immediately and that they don't have extra money lying around. The IRS has a list of approved reasons, such as medical expenses that insurance won't cover, payments to avoid eviction or foreclosure, funeral expenses and college tuition. The withdrawal is counted as income and subject to tax. On top of that, there is a 10 percent penalty if the employee is younger than 59 1/2 . And for six months after the withdrawal, the account is essentially frozen: Neither the employee nor the employer can contribute any money to it.

Despite the increase in the number of withdrawals, plan providers point out that the percentage of employees taking them is still small. At Fidelity Investments, for instance, it is only 1.6 percent. But with about 44 million people across the nation with private-sector 401(k)-style plans, even a small percentage can translate into hundreds of thousands of withdrawals.

A far greater number of employees borrowed against their retirement plans because it is easier than getting a hardship withdrawal or a bank loan that requires a credit check. It is also are attractive because, depending on the provider, the interest rate tends to be low, usually the prime rate plus 1 to 2 percent. Most plans allow employees to take a loan for any reason. But there is a law forbidding employees from borrowing more than $50,000 or half of the vested account balance, whichever is less. And if they leave their jobs before the loan is repaid - or if they lose their jobs, as is more likely in this economy - they have to pay off the balance soon after or incur the income tax and 10 percent penalty of a hardship withdrawal.

For 2007, the Transamerica Center for Retirement Studies found that 18 percent of more than 2,000 full-time employees surveyed had taken out loans, compared with 11 percent the previous year. Nearly half said they did it to pay off debt.

"Throughout the survey, we found a recurring theme of people struggling with short-term financial priorities versus their long-term retirement savings, and unfortunately, things like 401(k) loans have become sort of not the best solution but a quick and easy solution," said Catherine Collinson, president of the nonprofit center.

Borrowing $6,000 from his 401(k) has certainly made David Anderson's life a little easier, at least for the short term. It helped him pay off two credit cards with 30 percent interest rates, a debt that was costing him $500 a month. The lower interest rate on the loan means he has to pay $340 every three months for five years.

Anderson, a research scientist at George Washington University Medical Center, had a string of unfortunate events that made his salary feel inadequate. He got divorced after 13 years of marriage. The house he had bought with his ex-wife in Alexandria declined in value. And his car broke down, forcing him to buy a new one.

He tried to make extra money, selling his camera equipment on eBay. He thought about getting a second job but was already working long hours. A year ago, he began researching 401(k) loans. He knew all too well the arguments against it: Although he would essentially be paying himself back, that money would no longer be working for him in the market, meaning he would have a lot less money once he retires. And he would repay it in after-tax dollars then pay tax on the amount once he withdraws it at retirement, essentially resulting in a double taxation.

"I was concerned about the reduced earnings, but it's hurting myself in the future or hurting myself now. I chose to get rid of the current pain," he said.

Plan providers and analysts say borrowing from a retirement fund could have implications that reach beyond individuals to the economy. The nationwide savings rate is already abysmally low. If Americans were to deplete their 401(k) funds, they would probably have to work beyond the retirement age of 65 or risk living in poverty.

"Can we as a society afford an impoverished generation of senior citizens?" Collinson asked.

That prospect has disturbed federal lawmakers enough to spur action. Sens. Charles E. Schumer (D-N.Y.) and Herb Kohl (D-Wis.) introduced legislation last month that would limit 401(k) participants to three outstanding loans from their account at a time. The bill would also ban 401(k) debit cards.

They have their work cut out for them, plan providers and advisers said, because workers are not grasping from an early age the need to save for retirement. In a Fidelity-commissioned survey of about 1,200 workers ages 20 to 40, 51 percent said managing everyday finances, making mortgage payments and paying down credit card debt were higher priorities than saving for retirement. When switching jobs, 40 percent cashed out their retirement accounts rather than keeping it in a savings plan.

Like many in his age group, Sanchez, who makes $65,000 a year as a help desk supervisor for a manufacturing company in Virginia Beach, is more concerned about the present than the future. "I don't even think about it," he said of retiring.

His 401(k) account, which has about $40,000, is the only retirement savings he has. He had already borrowed $10,000 from it a couple of years ago to pay off some credit card debt. He applied for a substantial withdrawal, but his plan provider would give him only $1,500 because he is still paying off the loan. He said he could not rule out raiding the account again, especially if his memoir, due out in October, does not succeed.

"It's going to be a hard couple of years," he said. "In two years, I'd like to look back and say I made it through that, but it's tough right now."