Blacks and Hispanics More Likely to Borrow from 401(k)

May 1, 2012 ( – Blacks and Hispanics are more likely than whites and Asians to take loans and hardship withdrawals from their 401(k) plans. 

By Tara Cantore | May 01, 2012
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At the same time,  blacks and Hispanics borrow only slightly more of their retirement account balance, so members of all four groups put roughly the same amount of their assets at risk by borrowing from their retirement plans, according to research from Vanguard.

The study, “Diversity and Defined Contribution Plans: Loans and Hardship Withdrawals,” also notes that a 401(k) loan feature encourages some people to participate and save in their 401(k) plan. Thus, employees who participate in a plan and take a loan or hardship withdrawal are likely to be better prepared for retirement than coworkers who do not participate and have no retirement plan savings.

Borrowing from a 401(k) plan does raise the potential concern that monies intended for retirement may be diverted to other purposes. The researchers suggest that plan sponsors who are concerned about this can take steps to reduce 401(k) borrowing.

“The incidence of 401(k) loans is significantly higher in plans that allow multiple loans. As a best practice, sponsors should consider limiting participants to one loan outstanding and/or other modest borrowing restrictions. This strategy appears to reduce borrowing levels across all participants, and all racial and ethnic groups,” said Cyndy Pagliaro, a Vanguard researcher and lead author of the report.

Loans from 401(k) plan accounts, which are generally limited to half the  account balance (up to a maximum of $50,000), must be repaid via payroll deduction, so the money is eventually replaced unless the participant leaves the company and defaults on the outstanding loan balance.