Employee 401(k) loans on the rise

Increasingly more employees are damaging their financial futures by borrowing against their 401(k) plans. Retirement plan participants are taking out loans on their investments at an accelerated rate, as reported in Workforce Management.

Researchers from Boston College expect that the trend will continue and companies should expect to see more employee 401(k) loans this year.

With our country’s credit crisis and poor housing market, if they need the money, why shouldn’t employees take out a loan on their 401(k)?

The author of the Retirement Plan Blog explains why it’s a bad idea:

• They’re losing the earnings on their accounts since there’s less money to invest.
• The tax shelter advantage is lost since the loan is paid back with after-tax dollars.
• The interest paid on the loan is not deductible since it’s considered regular consumer debt.
• If the participant terminates employment prior to paying off the loan, the loan has to be repaid or it’s considered a taxable distribution with a 10% penalty tax if the participant is under age 59 1/2.

Some employees don’t even have the benefit of taking out a loan against their 401(k). Less than 50 percent of the workforce, ages 25 to 64, has any kind of defined benefit or defined contribution plan, according to the director of the Boston College Center for Retirement Research.

According to the research, of those eligible to participate in defined contribution plans:

• 89% do not contribute the maximum
• 20% to 25% do not contribute at all
• 45% do not rollover their investment when changing jobs

In companies that have automatic 401(k) enrollment, 86 percent of employees participate.

Automatic enrollment may not always be enough. Participants generally fail to increase the amount of their default contributions over time. According to the research, 61 percent do not increase their contributions above the default.

Educate your employees on why they should contribute to the company's 401(k) plan and coach them on how to effectively manage their money.

Employee 401(k) loans on the rise