Not only do individuals who take out 401(k) loans deplete their retirement savings by the sheer act of withdrawing money from their plan, but a recent report from New York Life confirms that those who take out 401(k) loans also contribute to their plan at a lower rate. The average contribution rate for a participant who takes out a loan on his or her 401(k) is 5.63%, compared with 7.23% for participants without loans.
Additionally, the study found that more than two-thirds of participants who are leaving their employer with an outstanding loan balance will take a cash distribution from their retirement plan rather than paying back the loan. "Americans are not saving enough for retirement and compounding this problem is the fact that loans can drain precious retirement dollars," said Rachel Rice, managing director of marketing and product development at New York Life Retirement Plan Services. "As an industry, we need to reverse the ATM mentality that has developed around 401(k) savings by encouraging sponsors to rethink loans from a plan design perspective, and enabling participants to differentiate between every day, emergency and retirement savings."
While eliminating loans entirely from 401(k) plans may not be an option, the New York Life data supports the notion that the number and size of loans available to participants should be limited.
