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The Availability and Utilization of 401(k) Loans

The Availability and Utilization of 401(k) Loans

(p.145) 4 The Availability and Utilization of 401(k) Loans
Investigations in the Economics of Aging
John BeshearsJames J. ChoiDavid LaibsonBrigitte C. Madrian
University of Chicago Press

This chapter, which examines the availability and utilization of 401(k) loans, explains how 401(k) loans work, describes the loan features that plan sponsors offer, and assesses how savings plan participants utilize 401(k) loans. Loan utilization rates follow hump-shaped patterns with respect to age, tenure, compensation, and plan balances, reaching peaks for participants in their forties, those with ten to twenty years of tenure, those earning $40,000 to $60,000 per year, and those with $20,000 to $30,000 in plan balances. Despite the prevalence of 401(k) loans, they constitute only 2.5 percent of total plan assets among plans with a loan option. Their utilization of is correlated with the types of loan rules adopted by firms. Loans are more likely to be used in plans that charge low interest rates, and conditional on taking a loan, loan sizes are larger when multiple loans are allowed to be outstanding simultaneously, the maximum loan duration allowed is long, and the loan interest rate is high. A commentary is included at the end of the chapter.

Keywords:   (401)k plans, savings plan, loans

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