Borrowing from the Future: 401(k) Loans and Their Consequences
April 19, 2014
Knowledge@Wharton recently interviewed Professor Olivia S. Mitchell about her new paper titled “Borrowing from the Future: 401(k) Loans and Their Consequences.” Mitchell, who is International Foundation of Employee Benefit Plans Professor and Faculty Affiliate, focuses her research, which is co-authored by Timothy (Jun) Lu from Peking University, HSBC Business School, and Stephen P. Utkus and Jean A. Young, both from Vanguard Center for Retirement Research, on the loans that people take form their 401(k) plans.
“Some in policy circles have suggested that loans should be completely outlawed — that is, that workers should be encouraged to save in their 401(k) plans, but they should be prohibited from borrowing at all. I think that’s the wrong message because employers understand that if they’re going to encourage the workers to contribute to their plans and the workers are low paid, they need to have the confidence and flexibility to be able to borrow if they get into a pinch,” Professor Mitchell states.
The also Executive Director of the Pension Research Council at Wharton suggests that “the right message is that loans can be structured judiciously and thoughtfully, and that the way they’re structured makes a big difference to employee behavior.” She adds that sponsors should analyze how they are allowing access to the plans, as well as possibly restricting multiple loans and potentially capping the amount that can be borrowed at a time.
“Also people are not particularly aware of the financial consequences of taking out a loan, especially if they become unemployed. So both of those topics need a lot more attention in the workplace as well as in policy circles,” she concludes. In the future, Professor Mitchell looks forward to continue to do research related to retirement plans in collaboration with Vanguard, specifically related to companies’ introduction of target date plans as investment options, for example.