The Truth about 401(k) Loans and Withdrawals

A new report[1] on 401(k) plan loans and withdrawals has spurred a number of articles in the media and, in some cases, significant misunderstanding.  One article in particular in the Washington Post paints a distorted picture alleging that “widespread breaching” of 401(k) accounts is on the rise and is “undermining” retirement security.

Hold on a second. That is pretty dramatic language to describe behavior that, in our experience with 2.6 million retirement plan participants, is anything but widespread or undermining.  What’s missing is some critically important context and perspective: loans and withdrawals are used by a very small percentage of 401(k) participants and involve a very small portion of overall retirement assets.

Contrary to the article, we have seen consistent and encouraging savings behavior even during the worst of the economic downturn. The percentage of participants taking loans and hardship withdrawals in the plans we service ticked up slightly between 2008 and 2010 but is now trending lower not higher[2].

The percent of our participants taking a new loan has declined by 3.5 percent since 2010 and is nearing pre-recession levels.  At the highest point, new loans represented only 7.2 percent of participants and just barely over one-percent of total retirement plan assets.

It’s key to point out that the majority of loans are paid back—into the participant’s account, with interest.  

Hardship withdrawals, which aren’t paid back but require proof of a specific financial need, represent an even smaller percent of participants and overall assets. These withdrawals are 5 percent lower than 2008.

To argue that this activity is somehow a reckless assault on retirement security is just not telling the whole truth.

Moderate 401(k) account borrowing is also reflected in data from the EBRI/ICI 401(k) database which is the largest of its kind, covering millions of participants and tens of thousands of plans.

Importantly, most participants we service have continued to contribute to 401(k) accounts and, as the recession has eased, deferral rates have increased by nine percent since 2009.

Bottom line: The lion’s share of retirement assets remain invested for the long term.

Finally, allowing limited access to loans and hardships is an important incentive for people to voluntarily enroll in a 401(k) plan and feel comfortable about deferring higher amounts of their pay.    This access is especially important to encourage middle and lower middle income workers to save—the ones who are MOST in need of retirement security.

In the end, a person with a 401(k) loan is preferable to a person without 401(k) savings.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

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[2] As of 12/31/2012, defined contribution plans with administrative services by the Principal Financial Group

  • Paul Smith

    Thank you for providing a more rational perspective than what is too often reported in the popular press. This is an important issue and it’s good to have a better understanding of its full context.

  • Margie Gillespie

    Coincidentally, I spoke with a decision-maker of a 401(k) plan last week who has an outstanding loan in the amount of $17,000. As you can imagine, his loan repayment amounts are rather high preventing him from participating in the plan. The employer offers a lucrative match (50% up to an unlimited deferral amount). He now realizes that by taking out the five-year loan under the 40(k) plan, he’s missing out on tax-deferred savings along with the employer match. He now says he would have taken a different route if he had thought all things through.

  • Mike Adelman

    You should consider responding to the Washington Post with an op-ed that is similar to what you have shared in this blog entry. There’s too much gloom and doom in the news, and offsetting even a small portion of that is a moral victory. Thanks for sharing this!

    • Larry Zimpleman, chairman, president and chief executive officer, the Principal Financial Group

      Thanks Mike. This post started out as a letter we sent to the editor of the Washington Post but it wasn’t published. So we expanded on the original and placed it here. It is getting heavy circulation on Twitter including by some well-known, widely read industry associations.

      • Mike Adelman

        That’s excellent to hear. Keep fighting the good fight!

  • Jason Yepko

    Nobody ever seems to discuss the fact that loans create double taxation on pretax contributions. After tax repayments as well as taxes paid upon distribution of dollars.

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