As younger workers aged and accumulated larger 401(k) account balances, they have an increased likelihood of taking out a 401(k) plan loan, according to a report from the Employee Benefit Research Institute and the Investment Company Institute released on Sept. 12.
The report, entitled "How 401(k) Plan Participants Use Loans Over Time: An Analysis of Loan Activity of Consistent 401(k) Plan Participants, 2016–2020," analyzed 401(k) plan loan usage for a sample of 2.2 million consistent loan-eligible 401(k) plan participants who maintained accounts each year between 2016 and 2020.
Overall, 29% of 401(k) participants in the sample had an outstanding loan at some point during the five-year period under analysis, compared with 18% as of year-end 2016.
Over the five years under study, the increase in loan usage was greatest among younger participants or for those with shorter job tenures as they aged into longer tenures and higher account balances available for loans. For instance, among participants in their 20s at the end of 2016, 7% had outstanding loans. However, when the five years analyzed are taken altogether, 21% of participants in their 20s had taken out plan loans.
"Taking a closer look at new loan activity reveals that some 401(k) plan participants appear to be using 401(k) plan loans to meet modest short-term financing needs," said Sarah Holden, senior director of Retirement and Investor Research at ICI, in a release issued along with the study. "Indeed, 401(k) plan participants who were observed initiating multiple loans between year-end 2017 and year-end 2020 tended to take smaller loans."
