A short term convenience that has a detrimental long term impact

401(k) loans and loan defaults. These terms conjure up all kinds of images depending on eyes the beholder. For a participant needing funds, a convenient, low cost way to access their 401(k) savings; for the plan sponsors, an unavoidable administrative inconvenience; for the record-keepers and trustees, the potential for a whole number of reconciliation issues.

None of these inconvenience issues come anywhere close to the real problem that is the subject of the white paper published by Navigant Economics. The real problem is the long-term, detrimental financial impact on retirement income for the borrowers.

Why do people borrow from their retirement savings plans, are there alternatives to help participants understand and realize how they hurt themselves in the long run by borrowing from the future to take care of the present?

As in the case with anything, there will be the truly difficult situations, and those who will take advantage of the plan loopholes and use the 401(k) plan as a financing vehicle – whether times are bad or not. No amount of education, or reinforcement can make a real dent in such cases. But the ones to address are borrowers who truly do not understand the impact per “paycheck” during retirement – especially those who default.

While technically savvy tools can be creatively generated to perform financial projections of the per paycheck impact of borrowing, the underlying problem to address is: financial instability. How do you financially protect anyone who has to deal with the recession, loss of a job, some financial catastrophe that forces them to default out of no other choice? And how do you deal with the issue of not having any other alternatives?

In addition to the suggestions in the white paper, how would you financially incentivize people to avoid taking a loan from the 401(k) plan? How would those incentives work? Some kind of a tax break, a tax credit for not taking a loan, or perhaps for paying off a loan early? A financial “reward” in the form of an employer match for never taking a loan from the plan or not defaulting on a loan while participating in the plan? Providing some kind of a premium retirement-related product or service?

Are there other ways that can be considered by the lawmakers?

Feel free to participate in the dialogue and share your thoughts.

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