Many 401(k) plans allow participants to take out loans from their individual 401(k) account. According to Employee Benefits Survey: 2024 Survey Report, 81% of corporate employer plans offered a 401(k) loan provision. While loan options provide flexibility for those tentative to contribute to 401(k) accounts, the option to borrow can also have a negative impact on retirement security. A plan sponsor is not required to make loans available to participants, per the Internal Revenue Service (IRS). The law doesn’t restrict how loan proceeds are used, although some plans establish acceptable reasons similar to hardship distribution criteria. Here’s a closer look at the most common reasons for 401(k) loans.
Across all generations, paying off debt was the most frequently cited reason participants took out a 401(k) loan in 2023, according to data from Principal’s “Retirement Security Survey—Loans and Withdrawals 2023.” The top three reasons for taking a 401(k) loan by generation were:
Baby Boomers:
- Debt (36%)
- Remodel/fix house (18%)
- Other expenses (13%)
Gen X:
- Debt (37%)
- Essential expenses (18%)
- Medical expenses (14%)
Millennials:
- Debt (35%)
- Essential expenses (23%)
- Mortgage/rent (16%)
Gen Z:
- Debt (39%)
- Essential expenses (21%)
- Mortgage/rent (11%)
Record-breaking inflation has participants seeking loans, likely looking for quick access to low-risk money to meet short-term financial priorities, the Debunking 401(k) Loan Myths report said.
The top reasons for loans have varied slightly over time. In an earlier study from 2016 titled The Current State of 401(k)s: The Employer’s Perspective from Transamerica Center for Retirement Studies, the primary reason for workers who have taken out a loan were:
- Unplanned major expenses (e.g., home or car repair, etc.) (23%)
- Paying off debt (23%)
- Purchase of a vehicle (11%)
- Home improvements (8%)
- Medical bills (8%)
- Purchase of primary residence (7%)
- Everyday expenses (6%)
- Tuition (2%)
- Planned repairs to a vehicle (2%)
- Some other purpose (10%).
Most plan sponsors believe that having a loan provision as part of their retirement plan is important for their participants.
An annual report that tracks loan behavior, Reference Point from T. Rowe Price, reported that the percentage of plans that permit loans increased steadily from 87% in 2014 to 92% in 2023. The share of participants with loans decreased steadily from 25% in 2014 to 18% in 2022 but went back up to 19% in 2023.
Are you considering loan options for your 401(k) plan but concerned about the potential consequences for participants? Stay tuned for a blog on 401(k) loan design considerations.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.
