WASHINGTON - A GAO report reinforces the widespread belief that 401(k) retirement plans that allow participant loans have higher contribution rates.
In fact, participants in plans that allow borrowing contribute 35% more, on average, than workers covered by 401(k) plans that don't allow borrowing, the report noted.
However, the report by the General Accounting Office also observed the provision can act as a double-edged sword, reducing the retirement income of those who might need it the most - low-paid workers, with few other assets, as well as minorities. This is especially true because many plans allow workers to borrow money at lower rates than they might have earned on their investments.
"However, other potential effects of borrowing could outweigh these disadvantages," the report noted, adding those who borrow to invest in education or acquiring new job skills could enhance their potential to earn more, and therefore increase their ability to save more for their old age.
"In addition, 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," the report states.
The report, requested by Sen. Charles E. Grassley, R-Iowa, chairman of the Senate Special Committee on Aging, could have widespread implications for any Social Security reform proposals that favor setting up individual accounts.
Opponents of such proposals worry that borrowing provisions could jeopardize the ability of older Americans to live off their Social Security income.
The report also notes recent tax law changes, aimed at encouraging Americans to save more for their old age, allow early withdrawal from individual retirement accounts for certain reasons, such as for the purchase of a first home.