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
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.