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Boon or bane: 401(k) loans and employee contributions
Jeffrey B Wenger1, Christian E Weller2
1Department of Public Administration and Policy, School of Public and International Affairs, The University of Georgia, Athens, GA, USA RAND Corporation, Santa Monica, CA.
Research on Aging
|February 5, 2015
Summary
Allowing loans from defined-contribution (DC) retirement plans increases savings, but this effect is stronger for individuals with consistent financial behaviors. Those with inconsistent borrowing habits show a smaller increase in savings when loans are permitted.
Area of Science:
- Behavioral Economics
- Retirement Planning
- Household Finance
Background:
- Economic theories predict retirement plan loan options increase contributions.
- Behavioral finance suggests nonlinear time discounting may reduce savings with loan access.
- Defined-contribution (DC) plans can act as commitment devices for retirement saving.
Purpose of the Study:
- To investigate the impact of DC plan loan options on household contributions.
- To differentiate the effects based on individuals' time discounting preferences and borrowing behavior.
- To reconcile conflicting predictions from traditional economic and behavioral finance models.
Main Methods:
- Analyzing household data on defined-contribution (DC) plan contributions.
- Segmenting participants based on consistent versus inconsistent borrowing behavior.
- Comparing savings behavior with and without access to DC plan loans.
Main Results:
- The option to borrow from DC plans increases current savings.
- This increase in savings is more pronounced for households exhibiting consistent borrowing behavior.
- Households with inconsistent borrowing behavior show a lesser positive response to the loan option.
Conclusions:
- DC plan loan provisions can positively impact retirement savings.
- Behavioral factors, specifically time discounting, moderate the effectiveness of loan options.
- Policy or plan design should consider individual financial behavior heterogeneity.
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