Borrowing from the Future: 401(k) Plan Loans and Loan Defaults
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retirement wealth
household debt
loan default
consumption
buffer-stock
Economics
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Abstract
Tax-qualified retirement plans seek to promote saving for retirement, yet most employers permit pre-retirement access by letting 401(k) participants borrow plan assets. This paper examines who borrows and why, and who defaults on their loans. Our administrative dataset tracks several hundred plans over 5 years, showing that 20% borrow at any given time, and almost 40% do at some point over five years. Employer policies influence borrowing behavior, in that workers are more likely to borrow and borrow more in aggregate, when a plan permits multiple loans. We estimate loan default “leakage” at $6 billion annually, more than prior studies.
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The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA), funded as part of the Retirement Research Consortium. The authors also acknowledge support provided by the Pension Research Council/Boettner Center at the Wharton School of the University of Pennsylvania, and the Vanguard Group. Programming assistance from Yong Yu is also appreciated. Opinions and conclusions expressed herein are solely those of the authors and do not represent the opinions or policy of the SSA, any other Federal agency, or any institution with which the authors are affiliated. Opinions and errors are solely those of the authors and not of the institutions providing funding for this study or those with which the authors are affiliated. © 2014 Jun, Mitchell, Utkus, and Young. All rights reserved.