Participants who take out loans from their 401(k) plan accounts have lower contribution rates than those who don't, according to new research by New York Life Retirement Plan Services.
In a first-time review of the 1.2 million participants in plans for which it is a record keeper, New York Life found the average contribution rate for participants with loans is 5.63% vs. 7.23% for those without loans, said Rachel Rice, managing director of marketing and product development, in an interview.
To counteract what she calls an “ATM mentality” of using 401(k) accounts for loans, Ms. Rice said New York Life suggests to clients that they cut accessibility of loans per participant to one — or none. The firm also recommends employers allow participants leaving the company to pay back the loan over time rather than demand immediate payment.
The New York Life report, based on data for year-end 2012, found that 68.5% of participants with outstanding loans will take a cash distribution when they leave their employer.
New York Life also found that average participation rates in 401(k) plans that offer loans are 76% vs. 67% for plans that don't offer loans.
Among New York Life clients, 96% offer loans, Ms. Rice said.