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