Rising 401(k) Loans: Helpful Tool or Troubling Economic Indicator?
401(k) Plans Financial Planning
Key Takeaways
- Despite inflation, rising credit card debt, mortgage payments, and car payments- plan participants continue to contribute to their 401(k) plans at 8.5%.
- Plan participants were 5x more likely to seek additional financial resources and 2x more likely to increase their deferral rate after watching a personalized financial education video, according to T. Rowe Price's study: https://www.troweprice.com/con....
We assume the message John Sullivan was trying to convey, is that the rise in 401(k) loans, in the absence of widespread reliable emergency savings, is a troubling economic indicator. Not that 40(k) loans are necessarily a bad idea for individuals struggling financially in the short-term.
So long as one pays the loan back in the designated term, it might be the layman's best option, currently. The difference with a 401(k) loan is:
- You can only take a loan amount (check with your plan provider) up to 50% of your 401(k)'s vested balance- during the time of repayment you must stay with that same employer, and you must pay back the balance in-full during the previously agreed upon term. If you are unable to do so, the loan is subject to the 10% early withdrawal penalty fee, and taxed as income if the lendee is under 59 1/2 years old; but there is no prepayment penalty fee, it is your (vested) money after all.
- During that time, the same amount you borrowed remaining in your 401(k) plan balance must be moved to a money market fund, as it cannot be exposed to the overall market fluctuations while you pay it back. Consider it akin to a margin account, "covering your bases".
- Most 401(k) loans are the best option for folks with short-term financial goals, when compared to other options with alternative lenders, banks, etc.
In a time where the national credit card debt has surpassed $1.03T, student loan repayments have resumed, and the cost of living is skyrocketing, it MIGHT not be such a bad idea for the individual. The suitability of the option relies largely on how close you are to retirement, how much you have saved in your 401(k), and if you have the flexibility to put your retirement investments "on the back burner" for a period of time.
Surely a 5% - 8% APR loan is light years more prudent than the 15% - 25% APR you are racking up on your credit cards, or that you would assume with another lender.
The economic conditions are less- way less- than desirable, but you should utilize the financial resources you have at your disposal. Just another reason your employer should offer a 401(k) plan, rather than go with the state's sub-par Auto-IRA program.
For more information on this subject, contact your retirement plan provider, financial advisor, or plan sponsor- and maybe use this helpful Investopedia article as a reference point: https://www.investopedia.com/a...
To read the National Association of Plan Advisors article in full: https://www.napa-net.org/news-...