Considering loan options for your 401(k) plan but concerned about the potential consequences? Here are five plan design ideas for plan sponsors who want to allow employees to borrow against 401(k) accounts and, at the same time, ensure the loan is repaid and add some retirement security protections.

Top 5 Tips for 401(k) Loan Program Design

An employee with an outstanding 401(k) loan who quits or loses his or her job generally has two options: (1) pay back the loan in full within 60 days or 2) “default,” meaning fail to repay the loan. In “Borrowing from the Future: 401(k) Plan Loans and Loan Defaults” (NBER Working Paper 21102), researchers Timothy (Jun) Lu, Olivia Mitchell, Stephen Utkus, and Jean Young found that while nine out of ten loans are repaid, defaults are very common among participants who terminate employment with loans outstanding. These design tips are intended to lower the balance of outstanding loans and prevent loan defaults regardless of employees’ job stability.

Chart Source: NBER Bulletin on Aging and Health

Top 5 Tips for 401(k) Loan Program Design

  1. Help employees learn about the loan.
    • Explain the consequences of changing jobs with a loan outstanding.
    • Prompt your employee to visualize where they see themselves five years in the future. We all tend to “discount” things that will happen far in the future as being less important than today’s needs.
    • Remind them about any financial counseling options available through your EAP.
    • Try a tool like the NCPA 401(k) Borrowing Calculator.
  2. Avoid “endorsement effect.”
    By including a loan option, your employees may perceive the plan design as a suggestion to use 401(k) assets for nonretirement reasons.

    • Permit only one loan.
      • The NBER authors compared the loan default activity of participants in multiple-loan plans to participants whose plans allowed only one loan at a time and found that participants with access to more than one loan were twice as likely to borrow from their accounts, suggesting that participants may view the multiple-loan option as an endorsement by their employer to go ahead and borrow against their retirement savings.
    • Limit loan access to only employee contributions.
    • Limit the dollar amount or percent of vested balance available.
    • Limit acceptable reasons for seeking the loan.
  3. Add service fees.
    • Plans with higher loan origination fees have smaller outstanding balances. (See data from the Aon Hewitt report Minimizing Defined Contribution Plan Loan Leakage.)
    • The higher the loan origination fee, the lower the balance. 77% of plan sponsors charge participants a fee to originate a loan. The most common service charge is $50, followed by $75.
  4. Simplify repayment.
    • Set up direct debit from a personal bank account instead of payroll deductions. When an employee changes jobs, the loan repayments can continue, like automatic bill-pay.
  5. Protect savings.
    • Continue employee contributions unchanged during repayment.

Explore more ideas for helping employees to stay on track to meet their retirement needs:

Jenny Lucey, CEBS
Information/Research Specialist at the International Foundation




Jenny Gartman, CEBS

Information/Research Specialist at the International Foundation

Favorite Foundation member service: Personalized Research Service

Benefits topics that interest her most: mental health, work/life benefits, retirement readiness of different generations

Personal Insight: Jenny gets things done. She started working on her CEBS just over two years ago. Welcoming her daughter into the world during this time frame did not slow her down—she recently completed her last exam and earned her designation. When she’s not working or studying she enjoys family playtime, knitting and exercising.


3 thoughts on “Top 5 Tips for 401(k) Loan Program Design

  1. Olivia S. Mitchell

    Nice of you to mention our work but it would be even better if you cited the authors’ names!
    Borrowing from the Future: 401(k) Plan Loans and Loan Defaults (NBER Working Paper 21102), researchers Timothy (Jun) Lu, Olivia Mitchell, Stephen Utkus, and Jean Young

    Olivia S. Mitchell
    Wharton School, University of Pennsylvania

    1. Ann Godsell, CEBS

      Thank you for the suggestion, Olivia. We have added the authors’ names to the post.

  2. George White

    I read with great interest your article on loan program design, and agree this is a valuable topic for plan sponsors working on this issue. I would however enhance your point #3. Instead of just increasing loan fees, which enriches a provider at no value to the participant, a plan can protect 401(k) plan loans from default through loan insurance. Loan insurance adds a few dollars to each loan payment, and repays the outstanding balance if a borrower loses their job. You can learn more at

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