COLLECTED WISDOM™ on 401k Loans
An Overview: 401k Loans - Summary: A quick overview and background on when 401k plan loans are allowed.
Located on: 401khelpcenter.com.
Retirement Wisdom on 401k Loans Turned Upside Down - Summary: Articles about 401k loans tend toward the negative - using terms like "erode" or "raid" when characterizing loans' effect on employees' retirement savings. Consultant says 401k hardship withdrawals, not plan loans, are true villain hindering effective retirement savings, then debunks other myths about 401k loans.
Source: Employee Benefit News, February 2012.
Participant Loan Request Form - Summary: This is a sample participant loan request form.
Source: Plan Design Consultants 
, January 2012.
401k Loan Defaults: Who Is at Risk and Why? - Summary: Click to Read Online Many 401k retirement plans allow participants to take loans from their accounts before they retire. However, if they have not paid them off before leaving their jobs, they must pay them in full immediately. Based on a large dataset from Vanguard, this study is the first of its kind to quantify how many people take out loans and, of those, how many default. It proposes changes in retirement policy to reduce the financial risk posed by these loans, particularly for vulnerable groups.
Source: The Financial Literacy Center , December 2011.
401k Loans at Less Than 'Prime Plus 2%' Pose Audit Risk - Summary: While conceding this general guideline isn't "etched in stone," officials cautioned that plans using a lower rate must be able to prove to an agent that individual participants could obtain an open-market loan bearing the lower rate. Below-market loans could trigger an IRS assessment of prohibited transaction excise taxes and violate the Code's anti-assignment rules, jeopardizing a plan's tax-qualified status.
Source: Mercer, November 2011.
Best Practices for Reducing Loans, Hardship Withdrawals, and Impulsive Investment Decisions - Summary: Negative behaviors such as using the 401k plan as an emergency fund instead of a long-term retirement savings account and taking excessive loans and hardship withdrawals is a symptom of a bigger problem among the employee population. The same is true for impulsive investment decisions that could ultimately delay employees' retirement. A combination of plan design and financial education works well to improve employees' financial wellness by casting a wider net in order to help employees help themselves without feeling pushed.
Source: 401khelpcenter.com, October 2011.
The Availability and Utilization of 401k Loans - Summary: This research documents loan provisions in 401k savings plans and how participants use 401k loans. For example, research found that although only about 22% of savings plan participants who are allowed to borrow from their 401k have such a loan at any given point in time, almost half had used a 401k loan over a longer, seven-year horizon.
Source: Yale University , June 2011.
Limiting Participant Loans to Active Employees - Summary: Most plan administrators and plan sponsors find participant loans to be a significant administrative challenge. To reduce the administrative burden and to make the loan program more cost effective, many 401k plans include provisions: (1) requiring payroll deduction to repay the loans, and (2) limiting the loans to active employees. This article addresses the issue of limiting participant loans to active employees.
Source: SunGard Relius, April 2011.
An Empirical Analysis of 401k Loan Defaults - Summary: Many 401k pensions allow plan participants access to their pension saving before retirement via a plan loan. This paper investigates the determinants of defaults on such loans, using a rich dataset of over 100,000 participants who terminate employment with a plan loan outstanding.
Source: RAND Corporation , March 2011.
Examine Loans and Withdrawals in the Right Context - Summary: Data widely reported in the industry media on loans and withdrawals from 401k plans have generated quite a buzz among plan sponsors. Some reports in recent months characterized participant loan and withdrawal activity as being at "record levels." However, a Vanguard analysis of loans as well as in-service and hardship withdrawals tells a different story.
Source: Vanguard, December 2010.
Borrowing from Yourself: The Determinants of 401k Loans - Summary: This paper explores the determinants of people's decisions to take 401k loans. It argues that 401k plans do not simply represent retirement saving, but they provide a means of saving for precautionary purposes. It model factors that rationally would induce people to borrow from their pension plans, and explains why people do not often use 401k loans to replace their more expensive credit card debt.
Source: Michigan Retirement Research Center , September 2010.
Loans Vs. Hardship Withdrawals: Penalties And Taxes - Summary: There are three ways that cash can be taken out from a 401k account: A regular 401k loan, hardship or non-financial hardship withdrawal. Each is explained in this article with the applicable provisions.
Source: Istockanalyst.com, November 2009.
401k Plan Asset Allocation, Account Balances, and Loan Activity in 2008 - Summary: Because 401k balances can fluctuate with market returns from year to year, meaningful analysis of 401k plans must examine how participants' accounts have performed over the long term. This study looks at consistent participants in the EBRI/ICI 401k database over the five-year period from 2003 to 2008 and reports on the findings.
Source: Investment Company Institute , October 2009.
New Evidence on 401k Borrowing and Household Balance Sheets - Summary: This working paper posits that households might utilize 401k loans less than expected due to risk-aversion, self-control problems, and confusion about the potential gains, and suggest better financial education that clarifies the conditions under which 401k borrowing is advantageous. Finally, it suggests that allowing households to repay 401k loans gradually even after separation from their employers could improve household welfare by reducing the risks of 401k borrowing.
Source: Federal Reserve Board, June 2009.
Sample Loan Policy - Summary: A sample loan policy and procedures prepared by the law firm of Reish Luftman McDaniel & Reicher.
Located on: Reish Luftman McDaniel & Reicher .
Sample Participant Loan Promissory Note - Summary: A sample Note prepared by the law firm of Reish Luftman McDaniel & Reicher.
Located on: Reish Luftman McDaniel & Reicher .
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