According to the Center for Retirement Research at Boston College, 11 percent of plan participants borrow from their 401(k) plan each year and about 20 percent currently have a loan outstanding to their account, based on data from Vanguard Group, which administers plans for more than 24 million Americans.
Ric Edelman, founder and executive chairman of Edelman Financial Services, thinks individuals should never borrow from their 401(k) plan.
“It’s not a loan; it’s a withdrawal, and it’s a really bad idea,” said Edelman, who advises more than 30,000 clients. He believes people should exhaust every other option available to them before touching the money they are saving for retirement.
“Using the money should be your very last resort,” he said. “If you still have a television set or jewelry, you haven’t exhausted all your options.”
Others see the loan provision in 401(k) plans as more benign and even desirable because it increases participation rates in the plans and possibly increases the amounts people are willing to contribute to them.
The Boston College research center sees outright withdrawals and cash-outs on job transitions as much bigger sources of “leakage” from 401(k) accounts. It estimates that 2 percent of assets in 401(k) plans are withdrawn annually, resulting in an average reduction in eventual retirement wealth of about 25 percent.
“The loans are typically not for large amounts, and the majority are paid off,” said Geoff Sanzenbacher, an economist at the center who used a 401(k) loan to purchase his first home out of graduate school. “My other credit options were very expensive.
“I think having a loan provision in plans is a good thing.”
There is no question that the average American should be contributing as much as he or she can to a 401(k) plan — and then leaving those savings as untouched as possible to appreciate for the future. The quality of their lives in retirement will depend on it. Here are the cases for and against borrowing from your future.