Financial Literacy and 401(k) Loans
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Based on a survey of nearly 900 401(k) participants, we find that borrowing in 401(k) plans is related not only to standard demographic factors, but also to measures of general financial literacy, 401(k) contribution rates and wealth, non-retirement wealth, and credit card repayment behavior. Taken together, these results suggest that the decision to borrow from a 401(k) plan is linked to a broader impatience in financial decision-making, namely high discount rates in time preferences. Meanwhile, conditional on loan-taking, financial literacy appears unrelated to whether a given loan is used for consumption or investment purposes. Given the interrelated nature of these borrowing and behaviors, efforts to educate participants about the benefits and risks of 401(k) borrowing may need to be more comprehensive in scope than previously realized.
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Opinions and conclusions are solely those of the author(s) and do not reflect views of the institutions supporting the research, with whom the authors are affiliated, or the Pension Research Council. Copyright 2010 © Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 07 August 2019