Borrowing from 401(k) plans is common, but not a cause for worry, contends a report issued by the National Bureau of Economic Research this week.
Almost 40 percent of defined contribution plan participants borrow from their retirement holdings within five years, according to the study.
The study also reported 20 percent of 401(k) holders have outstanding loans at any one time.
Despite this, the researchers called concern about 401(k) lending “overstated.”
They said they are opposed to restricting the loans, noting that permanent reductions (called leakage) from defaults on borrowing are less than one-tenth as much as reductions from 401(k) cash-outs when workers switch jobs. The former add up to $6 billion while the latter add up to $74 billion.
In another finding, 86 percent of plan participants who have loans outstanding default on them when they leave their jobs.
Not surprisingly, the researchers found that the easier employers made it for workers to borrow through multiple loans, the more workers borrow.
Workers “view the multiple loan feature as an employer endorsement of borrowing,” the researchers said.
However, the size of the individual loans are less than that for employers who permit only one loan at a time.
They said limiting workers to a single loan would lessen the number of employees who borrow from their 401(k)s and reduce the potential for losing money through defaults.