Does 401(k) Loan Repayment Crowd Out Retirement Saving? Implications for Plan Design

Using data from Vanguard 401(k) plans, we establish a new empirical fact: retirement plan contributions are remarkably stable after loans and hardship withdrawals. Relative to a control group, loan takers’ contribution rates fall by just 0.8 percentage points in the two years following loan issuance, despite simultaneously making large loan repayments. Relatedly, most participants continue making elective contributions after hardship withdrawals. For plan sponsors considering the introduction of penalty-free emergency withdrawals newly permitted under SECURE 2.0, our results suggest that most participants would be able to access this liquidity feature while maintaining their long-term retirement savings through an ‘automatic repayment’ feature.