Employees can repay the loan through payroll deductions and can continue to make contributions to their retirement accounts, Borland said. More than 80 percent of those with a loan do continue to save, she said.
"For these workers who take a loan, repay it and continue to save, they haven't done significant damage to their retirement prospects," Borland said. "They are at significant risk if they change jobs or lose their job."
The average interest rate on loans from 401(k) plans is the prime rate plus 1 percent, currently 4.25 percent, David Wray, president of the Profit Sharing/401k Council of America, said in an e-mail. The median loan origination fee in 401(k) plans is $75 and the median annual loan maintenance fee is $25, according to the council, a Chicago-based non-profit association of employers that sponsor retirement plans.
For workers who lose their jobs before repaying a loan, the bill would let them pay down their balances into an individual retirement account before filing their taxes for that year. That way the saver doesn't incur a withdrawal tax penalty on those funds, Bonfiglio said. The IRS and Treasury Department would need to issue guidance on how the process will work, he said. About $663 million of 401(k) loans in 2008 were deemed taxable distributions, according to a December report by the Department of Labor.
Hardship Withdrawals
The flexibility to take loans or withdrawals is an attractive feature of the accounts for some participants, said Sarah Holden, senior director of retirement and investor research for the Investment Company Institute, a mutual-fund trade group based in Washington.
"Knowing that you can borrow the money if you need to frees people to participate in the plan and contribute more," she said.
A 401(k) plan's terms also may let individuals take a hardship withdrawal that doesn't have to be repaid if they demonstrate a financial need such as medical or funeral expenses. That money generally is included in an employee's income for tax purposes and may trigger an additional 10 percent tax penalty, according to the IRS. Employees also are generally prohibited from making contributions to their account for at least six months after taking the withdrawal, the IRS said.
The legislation would allow participants to continue to contribute during the six months following a hardship withdrawal because the loss of employee and company matching contributions during that period can further erode retirement savings, according to Kohl's statement. Kohl said on May 13 that he won't seek re-election next year.
Debit Cards
The bill also would ban products that promote so-called leakage of savings including 401(k) debit cards, which may carry high fees, Bonfiglio said. While use of 401(k) debit cards are not widespread, they have been offered by companies in the past, he said. Using the card essentially triggers a loan.