Featured Topics
Retirement Industry
Magazine Archive
Education/Advice
Where Do you Go for Financial Advice?
Little Time to Repay Loan A loan borrower who leaves his job—whether voluntarily or by termination—will likely be required to repay the 401(k) loan in one lump sum to the previous employer. “Very few employers allow you to pay it back in payments,” Golladay cautioned. The full loan amount is sometimes due as soon as 30 days after a borrower leaves the company. Risk of Bigger Financial Problems Golladay said she has spoken with many people who took a loan from their 401(k) to pay one or two mortgage payments and avoid foreclosure. Unfortunately, taking this loan is not part of a long-term financial plan and only provides a short-term solution. In the end, many end up losing their houses anyway. “They’re really just kicking the can down the road for a month or two,” Golladay said. How Plan Sponsors and Advisers Can Help Individuals tapping their 401(k) accounts likely are experiencing a larger financial issue, she said, which is where plan sponsors and advisers can help. Advisers and sponsors can teach employees a broader sense of how to manage money to avoid taking a 401(k) loan, Golladay said. This can include encouraging employees to budget, have an emergency fund and pay off credit card debt. Plan sponsors should also be aware of what is happening within their companies. Are 401(k) loan rates within the company similar to the broad trend? Golladay said this information can help sponsors and advisers design the best education strategy.
Little Time to Repay Loan
A loan borrower who leaves his job—whether voluntarily or by termination—will likely be required to repay the 401(k) loan in one lump sum to the previous employer. “Very few employers allow you to pay it back in payments,” Golladay cautioned. The full loan amount is sometimes due as soon as 30 days after a borrower leaves the company.
Risk of Bigger Financial Problems
Golladay said she has spoken with many people who took a loan from their 401(k) to pay one or two mortgage payments and avoid foreclosure. Unfortunately, taking this loan is not part of a long-term financial plan and only provides a short-term solution. In the end, many end up losing their houses anyway. “They’re really just kicking the can down the road for a month or two,” Golladay said.
How Plan Sponsors and Advisers Can Help
Individuals tapping their 401(k) accounts likely are experiencing a larger financial issue, she said, which is where plan sponsors and advisers can help.
Advisers and sponsors can teach employees a broader sense of how to manage money to avoid taking a 401(k) loan, Golladay said. This can include encouraging employees to budget, have an emergency fund and pay off credit card debt.
Plan sponsors should also be aware of what is happening within their companies. Are 401(k) loan rates within the company similar to the broad trend? Golladay said this information can help sponsors and advisers design the best education strategy.