How to Help Loan Takers

August 5, 2013 ( – An analysis from New York Life found the average contribution rate for participants who have taken loans from their 401(k) plans is 5.63%, compared with 7.23% for participants without loans.

According to Rachel Rice, managing director of marketing and product development at New York Life Retirement Plan Services, what this shows is that when people have a loan, they are less likely to contribute to their plans. Rice told PLANSPONSOR this is not correlated with income; lower-income participants are not more likely to take loans. In fact, she said, middle-income participants who earn between $50,0000 and $70,000 are more likely to have loans outstanding.

Rice said New York Life is hoping the data (see “Loan Takers Save Less”) will lead plan sponsors to reduce the number of loans offered by their plans to one or none. “Some participants, especially if allowed more than one loan, use their 401(k) plan like an ATM,” she contended. “And we want participants to see their plans as long-term savings vehicles.”

New York Life also hopes plan sponsors will begin allowing loan continuation. Rice noted that most participants with an outstanding loan who leave an employer do not have the money right then to pay back the loan. If they were allowed to pay the loan back even if no longer employed, they could rebuild retirement savings. “It may also result in participants not taking a cash distribution of their balance,” she said.

Not only do participants who take loans often stop contributing to the retirement plan, due to inertia they often do fail to restart. Rice suggested that an auto-sweep will ensure participants get back into the plan. Participants can opt out if they want to, but, she said, from what she sees, most want to be in the plan. “It is good to automatically enroll new hires, but don’t leave people behind,” Rice stated. “Pick up people who dropped out for some reason, to enable them to continue saving.”

Rice believes participant loans are related to spending and saving patterns; people who take more loans are the people more likely to have difficulty budgeting and making good spending and saving decisions. Plan sponsors can offer education about budgeting, spending and saving, and use more holistic advisory services. According to Rice, New York Life is offering more one-on-one advisory services because it believes it will help people create a plan for saving and spending, which is one of the best indicators for success.

“I really do think whatever we can do to help people save, we should. Having access to 401(k) plans is good, but leakage from those plans is a crisis, and we want plan sponsors to help employees do whatever they can to increase savings,” she concluded.