Auto-enrolled 401k loan protection is a powerful tool to preserve retirement savings, according to new research from the Employment Benefit Research Institute (EBRI) and Custodia Financial.
The study shows a remarkable $1.96 trillion in retirement savings can be preserved if employers automatically enroll employees in 401k loan protection when they borrow from their defined contribution retirement plans.
The study released this week illustrates the severe damage that 401k loan defaults have on retirement savings, as well as the positive impact of 401k loan protection on retirement outcomes.
In one of the most extensive analyses of its kind, EBRI calculated the impact to retirement outcomes of adopting auto-enrolled 401k loan protection across over 27 million employee records from primarily large and medium-sized retirement plans. According to the analysis, researchers found that automatically enrolling employees in a 401k loan protection program would significantly improve retirement outcomes by reducing loan defaults and plan leakage.
A typical 401k loan default in the study will cost the average borrower aged 25-34 more than $150,000 during their career, according to the EBRI report. Today, 90% of employers include loans in their 401k plans, and 20% of plan participants typically have loans outstanding, providing employers incentive to prevent loan defaults and secure meaningful savings for employees.
“Loan default losses don’t have to happen, and this research clearly shows the need for employers to safeguard their workers with auto-enrolled 401k loan protection.”
Custodia Financial CEO Tod A. Ruble
“Loans provide 401k participants with access to their retirement savings during emergencies. Unfortunately, when employees leave their jobs, they default and incur taxes, penalties, and often cash out their entire account,” said Custodia Financial CEO Tod A. Ruble. “Loan default losses don’t have to happen, and this research clearly shows the need for employers to safeguard their workers with auto-enrolled 401k loan protection. Protecting loans will reduce America’s retirement savings shortfall by trillions of dollars.”
According to the EBRI report, trillions of dollars in plan assets are lost to loan defaults and the cash outs that follow. Since most loan “leakage” occurs after termination, protecting participant loans during this critical transition is necessary to prevent losses and strengthen retirement security. Worse yet, a recent AON study shows the problem is even more harmful for underrepresented minorities, who borrow from retirement plans and default at a much higher rate than the average saver.
“Many Americans face sizeable retirement deficits. The Employee Benefit Research Institute’s Retirement Security Projection Model provides invaluable insights as to how policy and plan features such as loan protection can make an impact on these deficits,'” said Lori Lucas, EBRI President and CEO.
Dallas-based Custodia Financial, the company behind Retirement Loan Eraser, has a sole purpose of safeguarding America’s retirement security by preventing 401k loan defaults.
The full EBRI 401(k) loan analysis can be found here: https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_551_kloans-24feb22.pdf?sfvrsn=e0f43b2f_2
SEE ALSO:
• How to Properly Pay Back a 401k Loan in the Coronavirus Pandemic
• Solving 401k Portability and Cashout Leakage a Key DOL Priority