The Availability and Use of 401(k) Loans

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About 22 percent of eligible participants have a 401(k) loan outstanding at any given time.

Borrowing from defined contribution savings plans, including 401(k) plans, has long been permissible under Department of Treasury and Department of Labor regulations. Nevertheless, the impact of this borrowing on economic outcomes has not been studied in depth. The growth of 401(k) loans, coupled with the introduction of the 401(k) debit card, has motivated some in Congress to propose legislation that would limit the number of outstanding 401(k) loans to three per participant and to ban 401(k) debit cards outright. The concern is that easy access to one's retirement nest egg will lead to excessive consumption in the present at the expense of future financial security.

In The Availability and Utilization of 401(k) Loans (NBER Working Paper No. 17118), authors John Beshears, James Choi, David Laibson, and Brigitte Madrian document the widespread availability and utilization of 401(k) loans: about 90 percent of 401(k) participants are in plans that offer a loan option. Within those plans, on average about 22 percent of eligible participants have a 401(k) loan outstanding at any given time. A much higher fraction, slightly less than half, use a 401(k) loan over the seven-year period from 2002 through 2008 that the authors study.

There are no regulatory restrictions on how the proceeds from a 401(k) loan may be used, nor are borrowers required to demonstrate financial need. Plan sponsors have discretion to impose such restrictions if desired, but most do not. Among savings plans with a loan option, 82 percent place no restrictions on how loan proceeds may be used. Of the 18 percent of plans with restrictions, most allow loans for home purchases, education, and medical expenses.

Loan utilization rates first rise and then fall with respect to age, tenure, compensation, and plan balances. They reach peaks for participants in their 40s, those with 10 to 20 years of tenure, those earning $40,000 to $60,000 per year, and those with plan balances between $20,000 and $30,000. For those who have a loan, the loan-balance-to-401(k)-balance ratio declines with age, tenure, compensation, and 401(k) plan balance.

The authors find that 401(k) loan utilization also is correlated with the types of loan rules adopted by firms. Loans are more likely to be used in plans that charge low interest rates. For those taking a loan, loan sizes are larger when multiple loans are allowed to be outstanding simultaneously, and when the maximum loan duration allowed is long.

--Lester Picker