A study by Fidelity Investments of 13 million 401(k) investors across U.S. metropolitan regions pinpointed the cities where plan loans are most heavily used.
The analysis found the greatest percentage of participants with outstanding plan loans, at 33 percent, in the McAllen, Texas, area. The second-largest proportions of borrowers were in the Riverside and Bakersfield, Calif., areas, with 32 percent and 31.3, respectively, holding outstanding loans against their accounts in their employers’ defined contribution plans. Next was El Paso, Texas, with 30.7 percent, followed by Youngstown, Ohio, with 29.9 percent.
Conversely, Madison, Wis., recorded the lowest rate of plan loan usage by participants in the large Fidelity study: 10 percent. The next-lowest borrowing occurred in the San Jose and San Francisco, Calif., areas, with plan loans outstanding for 11.1 and 13.4 percent of participants, respectively.
Plan loans may be a good alternative to in-service withdrawals of funds by participants not yet 59½ years old, or too young for so-called normal retirement age distributions, so that’s one reason for employer plans to consider offering them. From a plan sponsor’s perspective, the good aspects of plan loans for participants must be balanced against the cost and ongoing administrative burden of the loan program to make them worthwhile.
For example, it is common for employer-sponsored 401(k) arrangements to include provisions for withdrawal of funds for various reasons. But once these funds are withdrawn, the employee must pay income tax plus a possible early-distribution tax. Often, after the funds are tapped, the plan account is never replenished, leading to “leakage” that endangers participants’ financially secure retirement later. Plan loans offer these employees the opportunity to use their retirement savings on a non-taxable basis with the opportunity (and requirement) to replenish the funds with interest. (See ¶460 in the Guide to Assigning and Loaning Benefit Plan Money.)
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