As younger workers age and accumulate larger account balances, their likelihood of taking a 401 (k) loan from their 401(k) plan grows.
That’s the newest finding from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI), which found higher loan activity among 401(k) plan participants from 2016 to 2020. The report, “How 401(k) Plan Participants Use Loans Over Time: An Analysis of Loan Activity of Consistent 401(k) Plan Participants, 2016-2020,” analyzed 401(k) plan loan usage of 2.2 million consistent loan-eligible 401(k) plan participants who maintained accounts between 2016 to 2020.
Overall, 29% of 401(k) participants in the sample had an outstanding loan at some point in the five years analyzed, compared with 18% at year-end 2016, the study reported.
“With respect to borrowing, a participant’s lifecycle of 401(k) plan loan usage must be examined, since 401(k) plan loans tend to be a multiyear process,” explained Craig Copeland, director of Wealth Benefits Research at EBRI, in a statement. “The longitudinal look at loans reveals a higher prevalence of borrowing, including repeat behavior.”
Over the five years analyzed in the research, a rise in loan usage was most prevalent among younger participants or those with lower job tenure, as they aged into longer tenure and higher account balances available for loans. Among participants in their 20s, just 7% had outstanding loans at year-end 2016. However, when the five years were analyzed together, the research found that 21% of participants in their 20s had taken out plan loans.
Researchers say it’s likely the 20-something professionals had taken out loans to meet short-term financing needs. According to the data, at year-end 2017, 64% of participants with new loans and total account balances greater than $100,000 took out 10% or less of their account balance as a loan, compared with 16% of those with balances of $10,000 or less.
On the other hand, those with smaller accounts were more likely to take a larger share, the study reported: 57% of those with new loans and balances of $10,000 or less at year-end 2017 took out more than 20% of their balance, compared with 14% of those with balances of $100,000 or more.
Repeat-loan participants were the likeliest to take out smaller loans, at 16% of the overall participant sample and 55% of the 29% with any loans over the past five years.
“Indeed, 401(k) plan participants who were observed initiating multiple loans between year-end 2017 and year-end 2020 tended to take smaller loans,” examined Sarah Holden, senior director of Retirement and Investor Research at ICI.
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