Borrowing from the Future: 401(k) Plan Loans and Loan Defaults

by Timothy (Jun) Lu, Olivia S. Mitchell, Stephen P. Utkus, Jean A. Young

ARTICLE | National Tax Journal | No. 1, Vol.70, 2017

Abstract

Most employers permit 401(k) plan participants to borrow from their retirement plan assets. Using an administrative dataset tracking over 800 plans for five years, we show that 20 percent of workers borrow at any given time, and almost 40 percent borrow at some point over five years. Also, workers borrow more when a plan permits multiple loans. Ninety percent of loans are repaid, but 86 percent of workers who change jobs with a loan default on the outstanding balance. We estimate that $5 billion per year in defaulted plan loans generate federal revenues of $1 billion annually, more than previously thought.

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Borrowing from the Future: 401(k) Plan Loans and Loan Defaults

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