COLLECTED WISDOM™ on 401k Loans

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17 Tips for 401k Loan Program Design

The article outlines strategies for 401k plan sponsors to manage participant loans effectively while promoting retirement security. To help plan sponsors implement loan options while mitigating potential drawbacks, 17 ideas are suggested here. These aim to educate participants, minimize the perception that loans are endorsed for nonretirement purposes (the endorsement effect), reduce outstanding loan balances, and prevent defaults, regardless of employees' job stability.

Source: Ifebp.org, December 2024

New Research on 401k Loans and Leakage Unveils a Big Surprise

A recent paper from researchers at Harvard, Yale, and Vanguard presents a new perspective on retirement plan leakage, particularly regarding 401k loans and withdrawals. Titled “Does 401k Loan Repayment Crowd Out Retirement Saving? Implications for Plan Design,” the study examines the impact of legislative changes under SECURE 2.0, especially the provision allowing penalty-free emergency withdrawals of up to $1,000. The authors argue that these changes may increase early withdrawals, highlighting the balance between immediate liquidity needs and long-term wealth accumulation.

Source: Asppa-net.org, November 2024

Borrowing From 401k Loans Is Actually Okay, Study Finds

A recent study by the Wharton Pension Research Council found that retirement plan contributions remain stable even after participants take loans or hardship withdrawals from their 401k accounts. This challenges the belief that allowing loans could negatively impact savings behavior. The research suggests that, when managed properly, loans can help individuals borrow responsibly. With many 401k participants automatically enrolled and sticking to default contribution rates, their saving habits tend to remain consistent over time, as noted by Aaron Goodman, a Vanguard economist and co-author of the study.

Source: Investmentnews.com, October 2024

What to Tell Participants About Tapping Into Their Retirement Savings

Participants may be worried. If the worst happens, they may look to their retirement plan as a source of financial relief. The ability to access retirement assets may be important for participants' peace of mind, but they must make an informed choice. While plan sponsors should review the plan's rules to help prepare their communications, the FAQs here offer a starting point for addressing participant inquiries.

Source: Blackrock.com, August 2024

401k Loans: Debunking the Myths

The retirement industry has long debated the need for and use of 401k loans. Many think that borrowing from a retirement account is sacrificing long-term financial security for a short-term fix. But what if retirement loans are just misunderstood? Research reveals an evolved perspective and approach to retirement loans.

Source: 401kspecialistmag.com, December 2023

401k Loans, Hardship Withdrawals at 2-Year High

Loan and hardship withdrawals taken from workplace retirement plans in the third quarter of 2023 hit their highest levels in more than two years, according to a report from Empower. Among a study of 5.3 million defined contribution workplace savers in Empower accounts, 0.8% took hardship withdrawals in Q3, and 2.6% took out loans from their savings. Those were the highest rates in the past eight quarters.

Source: Planadviser.com, December 2023

401k Loan Activity Among Younger Workers Rises With Age

The study by EBRI and ICI found that 29% of younger 401k participants had an outstanding loan at some point in the five years analyzed, compared with 18% at year-end 2016. As younger workers age and accumulate larger account balances, their likelihood of taking a loan from their 401k plan grows.

Source: 401kspecialistmag.com, September 2023

How 401k Plan Participants Use Loans Over Time

This report analyzes 401k plan loan usage for a sample of 2.2 million consistent loan-eligible 401k plan participants, participants who maintained accounts in each year between 2016 and 2020 and were in plans offering loans.

Source: Ebri.org, September 2023

Think Twice Before Borrowing From 401k for a Home Down Payment

The average price for U.S. houses sold during the second quarter was nearly $500,000. That, coupled with the highest mortgage interest rates in over 20 years, could make a 401k loan appealing for buyers. Whether that's a good idea is another matter. In the best-case scenario, financial advisors say: It's complicated. For most people, their answer tends to be: Don't even think about it.

Source: Investmentnews.com, August 2023

SECURE 2.0 Expansion of Self-Correction Program and Plan Loan Error Corrections

In a measure that substantively affects plan sponsors and alters retirement plan correction practices, SECURE 2.0 significantly expands the availability of self-correction by widening the range of operational failures for which self-correction is available, including plan loan errors.

Source: Spotlightonbenefits.com, February 2023

401k Loans and Hardship Withdrawals Decreasing: Report

Newly released data from year-end 2022 shows that the volume and dollar amount of 401k loans and hardship withdrawals decreased, but there were some nuances to the findings. In a new quarterly report that draws on data from more than three million 401k plan participants, Bank of America's 401k Participant Pulse report reveals that fewer participants took hardship withdrawals for immediate financial needs.

Source: Napa-net.org, February 2023

Loans and Hardship Withdrawals From 401ks on the Rise

More Americans are tapping their 401ks for financial emergencies, with the percentage of retirement savers pulling money for hardships spiking 24% in the 12 months through Sept. 30, according to new data.

Source: Investmentnews.com, November 2022

Participant Loans: Important Considerations

Many retirement plans allow participants to take loans from their accounts. But that entails more than simply deciding to allow participants to do so. That is only the beginning. Some procedures must be followed, and important considerations that flow from that initial choice. Here are some questions and matters concerning plan loans.

Source: Asppa.org, November 2022

Should 401k Loans Be Allowed, Encouraged, or Forbidden? A Fiduciary Perspective

As interest rates increase, the cost of borrowing money has increased. It's not surprising if more people begin to look at borrowing from their own 401k retirement savings accounts versus borrowing from more traditional sources. Is this a good idea? Indeed, is it not just a good idea, but something that should be encouraged? Or is it the path to retirement ruination and should it not even be allowed?

Source: Fiduciarynews.com, November 2022

Participant Loans: Common Loan Errors and How to Fix Them

Prohibited transaction violations associated with participant loans, which are corrected under the DOL's separate Voluntary Fiduciary Correction Program, are less common than the day-to-day operational failures that can result in taxation to the participant. Therefore, this article focuses on the solutions for correcting participant loan errors through the Employee Plans Compliance Resolution System and its Self-Correction Program.

Source: Newfront.com, August 2022

Participant Loans: Technical and Fiduciary Considerations

Of utmost importance is the obligation of plan sponsors to comply with the legal requirements governing participant loans. The failure to comply may lead to a taxable event for the borrowing participant and a prohibited transaction for the plan fiduciaries. Here is a review of the technical and fiduciary considerations involved when participant loans are available through your company 401k plan.

Source: Newfront.com, August 2022

IRS Updates Issue Snapshot on Participant Loans

On Sept. 28, the IRS updated the "Issue Snapshot" which discusses the laws and regulations governing plan loans. This article reviews the update.

Source: Asppa.org, October 2021

Deemed Distributions: Participant Loans - Updated

Participant loans are available in many retirement plans, although plans are not required to offer participant loans. Failures may occur when participant loans exceed the maximum dollar amount, have payment schedules that do not meet the time or payment requirements or go into default when payments are not made. Each of these failures, and other issues, will cause the loan to become a deemed distribution for tax purposes. This updated IRS "Issue Snapshot" will summarize what triggers a deemed distribution and when it can occur.

Source: Irs.gov, September 2021

Retirement Plan Loans: A Brief Review

If your plan's adoption agreement is set up to allow loans, participants can borrow against their account balance. Some participants may find this an attractive option as the interest they pay on the loan is returned to their retirement account as opposed to other loans where the interest is paid to the lender. This is a brief review of retirement plan loans.

Source: Berrydunn.com, September 2021

Essentials to Limit Loans and Hardship Withdrawals

Though research from Vanguard determined that retirement plan loan and hardship withdrawal activity decreased in 2020, experts say employers should consider enacting procedures to limit retirement plan distributions while still offering help to their participants in emergencies. Plan sponsors should educate their employees about distributions, and they can help their workers set up emergency savings accounts to avoid tapping into retirement funds.

Source: Plansponsor.com, August 2021

Percentage of 401k Participants With Loans Dropping

At the end of the first quarter, about 14% of 401k participants had outstanding loans. The percentage fell steadily throughout last year after edging up to 16.3% in the year-ago period from 16.1% in the fourth quarter of 2019.

Source: Pionline.com, July 2021

Best Practices for Reducing Loans, Hardship Withdrawals, and Impulsive Investment Decisions

Negative behaviors such as using the 401k plan as an emergency fund instead of a long-term retirement savings account and taking excessive loans and hardship withdrawals is a symptom of a bigger problem among the employee population. The same is true for impulsive investment decisions that could ultimately delay employees' retirement. A combination of plan design and financial education works well to improve employees' financial wellness by casting a wider net in order to help employees help themselves without feeling pushed.

Source: 401khelpcenter.com

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