Wharton Pension Research Council Working Papers

Borrowing from the Future: 401(k) Plan Loans and Loan Defaults

Timothy (Jun) Lu, Peking University
Olivia S. Mitchell, The Wharton School, University of Pennsylvania
Stephen P. Utkus, Vanguard
Jean A. Young, Vanguard


Most active 401(k) participants have the option of borrowing from their retirement accounts, and nearly 40 percent do so over a five-year period. We show that employers’ loan rules have a strong endorsement effect on borrowing patterns; that is, in plans allowing multiple loans, participants are more likely to borrow and take out larger loans. While the liquidity-constrained are most likely to borrow, better-off employees take out larger loans when they do borrow. We also provide a new estimate of loan default “leakage” at $6 billion annually. Our results show that defined contribution retirement plans, while designed mainly to support old-age financial security, include important features for financing current consumption.


Date Posted: 12 March 2019