Borrowing from the Future: 401(k) Plan Loans and Loan Defaults

35 Pages Posted: 14 Nov 2014

See all articles by Timothy (Jun) Lu

Timothy (Jun) Lu

Peking University HSBC Business School

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Stephen P. Utkus

University of Pennsylvania; Center for Financial Markets and Policy, Georgetown University

Jean A. Young

The Vanguard Group, Inc. - Center for Retirement Research

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2014

Abstract

Most active 401(k) participants have the option of borrowing from their retirement accounts, and nearly 40 percent do so over a five-year period. We show that employers' loan rules have a strong endorsement effect on borrowing patterns; that is, in plans allowing multiple loans, participants are more likely to borrow and take out large loans. While the liquidity-constrained are more likely to borrow, better-off employees take out larger loans when they do borrow. We also provide a new estimate of loan default "leakage" at $6 billion annually. Our results show that defined contribution retirement plans, while designed mainly to support old-age financial security, include important features for financing current consumption.

Suggested Citation

Lu, Timothy (Jun) and Mitchell, Olivia S. and Utkus, Stephen P. and Young, Jean A., Borrowing from the Future: 401(k) Plan Loans and Loan Defaults (February 1, 2014). Pension Research Council WP 2014-01, Available at SSRN: https://ssrn.com/abstract=2517447 or http://dx.doi.org/10.2139/ssrn.2517447

Timothy (Jun) Lu

Peking University HSBC Business School ( email )

University Town
Nanshan District
Shenzhen, Guang Dong 518055
China

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephen P. Utkus

University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Center for Financial Markets and Policy, Georgetown University ( email )

Washington, DC 20057
United States

Jean A. Young

The Vanguard Group, Inc. - Center for Retirement Research ( email )

PO Box 1110
Valley Forge, PA 19482-1110

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