July 27, 2012 (PLANSPONSOR.com) - The summer brings higher
temperatures—and according to benchmarking data from Charles Schwab, it also
brings a higher rate of 401(k) loans.
Requests for 401(k) loans jump about 16% from June to August,
Charles Schwab found. To add to the problem, many borrowers are unable to repay
Catherine Golladay, Schwab vice president of Participant
Services, told PLANSPONSOR this
increase in 401(k) loans in the summer seems unrelated to economic downturn.
Charles Schwab has been tracking this loan data since 2005, and Golladay said
the 16% rate has remained the same on average—but why?
College funding is one main reason participants take 401(k)
loans in the summer, Golladay explained. Another reason is cash flow, as
participants may have used their income tax refunds to bridge a gap earlier in
the year and need additional funds in summer.
While taking out a 401(k) loan may seems like a quick an
effective fix, Golladay cautioned that doing so can cause many long-term
While people repay their loans, they usually stop
contributing to their 401(k) plans. “When you’re taking a loan from your 401(k)
plan, many times it’s because you’ve got challenges with cash flow,” Golladay
Loans are paid back into a 401(k) with after-tax money, which ends up
getting taxed again when it is withdrawn at retirement. Essentially, Golladay
explained, participants will be double taxed. “It really does have what could
be a devastating effect on your account,” she added.