Q: Erick, we are interested in any data you have regarding employees who take loans from their account. Specifically, do they tend to stop or reduce their current contributions while paying back the loan?
A: According to Principal’s recent research report, “401(k) Loans: Debunking the Myths,” participants borrowing from their account continue to save for retirement while paying back their loan. A strong majority, 83%, continued contributing to their retirement account at the same deferral rate as before taking the loan, whereas only 4% stopped deferring. The survey cites this as a strong indication that many participants can manage their short-term financial needs while keeping their long-term retirement goals.
Next step: Let’s meet and discuss your Employee Benefits Package. Book a meeting!
Can You Pay Off a 401(k) Loan Early?
In many plans, yes. Whether a participant can repay a 401(k) loan early, in full or in part, depends on the plan document and the plan’s written loan policy, not on what the payroll or recordkeeping system makes easy. When a participant asks, plan sponsors should check those documents first and apply them consistently. If the documents are silent, the decision is a fiduciary one, and prudence should come before administrative convenience. Refusing a reasonable prepayment request could raise questions, especially if the participant later defaults on the loan. Employees should also know that leaving their job can change the repayment timeline on an outstanding loan.
Retirement Partners of California, an advisor with a fiduciary standard, helps employers review loan policies and explain repayment rules to employees. Consult your plan document, ERISA counsel, or advisor about your plan’s specific rules.
Should a 401(k) Plan Allow More Than One Loan at a Time?
There’s no single right answer, but sponsors should weigh the trade-offs. T. Rowe Price’s 2022 Reference Point report found that plans permitting multiple loans tended to have lower average deferral rates and higher average loan balances than plans permitting one loan. Limiting participants to one outstanding loan can still meet a genuine short-term need while discouraging repeated borrowing for less essential reasons. Other design choices to consider include minimum loan amounts, waiting periods between loans, and pairing the loan feature with emergency savings options or financial education. Any change must be reflected in the plan document and loan policy and communicated to participants.
Retirement Partners of California works with employers to review loan provisions alongside participant data. Consult your plan document, ERISA counsel, or advisor before changing your loan design.
Retirement Partners of California Can Help!
We’ll design an Employee Financial Education Plan to help improve your 401k participant results.
Disclosures, Sources, and Footnotes
For plan sponsor use only, not for use with participants or the general public. This information is not intended as authoritative guidance or tax or legal advice. You should consult with your attorney or tax advisor for guidance on your specific situation.
Kmotion, Inc., 12336 SE Scherrer Street, Happy Valley, OR 97086; www.kmotion.com
©2024 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.
RP-265-0525 Tracking #750406 (Exp. 06/27)
