401(k) Pension Plans

More employees are likely to participate in 401(k) pension savings plans when they are allowed to borrow from those plans. Moreover, participants in plans that allow borrowing contribute, on average, 35 percent more to their pension accounts than do participants in plans that do not permit borrowing. GAO found that relatively few plan participants--less than eight percent--have one or more loans from their pension accounts. Blacks and Hispanics, lower-income persons, participants who have recently been turned down for a loan, and workers who are also covered by other pension plans are more likely to borrow from their pension account than are other participants. The loan provisions of many pension plans provide for loan repayment at favorable interest rates, which may be lower than the investment yield that could have been earned had the money been left in the pension account. Consequently, the borrower may have a smaller pension balance at retirement because the interest paid to the account is less that what could have been earned from investing in equities. On the other hand, borrowing can help plan participants meet other financial goals. For example, borrowing for education or training could boost a family's lifetime income and, hence, retirement income.

GAO found that: (1) plans that allow borrowing have a somewhat higher proportion of employees participating than other plans, all other factors being equal; (2) in addition to employer matching, allowing borrowing increases participation among eligible employees, especially lower-income employees; (3) allowing pension-plan borrowing also significantly affects how much employees contribute; (4) participants in plans that allow borrowing contribute, on average, 35 percent more to their pension accounts than participants in plans that do not allow borrowing; (5) based on individual financial data GAO examined, relatively few plan participants--less than 8 percent--have one or more loans from their pension accounts; (6) this is true for a point in time and would not include those who had repaid a past loan or who might borrow in the future; (7) blacks and hispanics, lower-income individuals, participants who have recently been turned down for a loan, and workers who also are covered by other pension plans are more likely to borrow from their pension account than other participants; (8) plan borrowers, on average, have fewer assets than nonborrowers and have more nonhousing debt relative to income than nonborrowers; (9) while borrowing provisions may reduce retirement income, they also can encourage workers to save for their retirement; (10) loan provisions of many pension plans provide for repaying the loan at favorable interest rates, which may be lower than the investment yield that could have been earned had the money been left in the pension account; (11) consequently, the borrower will have a smaller pension balance at retirement, since the interest paid to the account is less than what the account balance could have earned form investing in equities; however, other potential effects of borrowing could outweigh these disadvantages; (12) if loan provisions influenced the employee's decision to participate in the pension plan, the employee's retirement income would likely have been even less had there not been such provisions; (13) allowing participants to borrow from their defined-contribution pension plan, therefore, may be a double-edged sword; and (13) there are both advantages and disadvantages to borrowing from other voluntary retirement savings accounts, such as individual retirement accounts, however, few of the positive effects of pension-plan borrowing would be realized in mandatory retirement programs like Social Security.