Borrowing from the Future: 401(k) Plan Loans and Loan Defaults
35 Pages Posted: 14 Nov 2014
Date Written: February 1, 2014
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.
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