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BORROWING FROM THE FUTURE? 401(K) PLAN LOANS AND LOAN DEFAULTS
Timothy Jun Lu1, Olivia S Mitchell2, Stephen P Utkus3
1Peking University - HSBC Business School Room 725; Peking University Campus, University City, Shenzhen 518055.
National Tax Journal
|October 10, 2019
Summary
Many workers borrow from their 401(k) retirement plans, especially when multiple loans are allowed. Job changes often lead to loan defaults, generating significant federal revenue from unpaid balances.
Area of Science:
- Retirement Planning
- Personal Finance
- Labor Economics
Background:
- Employer-sponsored 401(k) plans are a primary retirement savings vehicle for many workers.
- Plan loans are a common feature, allowing participants to access retirement funds before retirement age.
Purpose of the Study:
- To analyze the prevalence and patterns of 401(k) plan borrowing.
- To investigate the impact of loan policies on borrowing behavior.
- To quantify the financial consequences of loan defaults, particularly upon job separation.
Main Methods:
- Utilized a longitudinal administrative dataset covering over 800 401(k) plans.
- Tracked participant borrowing and repayment behavior over a five-year period.
- Analyzed loan default rates in relation to employment changes.
Main Results:
- Approximately 20% of workers borrow from their 401(k) at any given time, with nearly 40% borrowing over five years.
- The availability of multiple loan options increases borrowing frequency.
- While 90% of loans are repaid, 86% of workers who change jobs with an outstanding loan default.
Conclusions:
- 401(k) loan policies significantly influence participant borrowing.
- Job mobility presents a substantial risk for loan default, impacting retirement savings.
- Defaulted 401(k) loans generate an estimated $1 billion annually in federal revenue, a figure higher than previously estimated.
Keywords:
D04D09D14H24J32buffer-stockconsumptionhousehold debtloan defaultretirement plan loanretirement wealthMore Related Videos
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