Benefits and Compensation, Uncategorized

ESPP Loans Can Make 401(k) Plan Loans Less Attractive

Employee Stock Purchase Plans can reduce 401(k) plan loans, a prominent money management firm says.

Fidelity Investments found that employees are less likely to take out a loan from their 401(k) account if their company also features an employee stock purchase plan. Employee funds held in these often-discounted stock plans, which are increasingly seen as a “complementary workplace savings vehicle to their 401(k),” present a “viable option” for workers who need to draw on savings for immediate and pressing financial needs, Fidelity said.

Fidelity analyzed companies offering both an ESPP and a 401(k), and compared plan participant borrowing to that at companies that offer only a 401(k). The firm noted that those with access to both types of savings plans tended to withdraw a smaller amount from the 401(k) and have lower outstanding loan amounts. Employees often reduce or stop saving in their 401(k) accounts after taking out a loan from that source, which can endanger their future retirement income.

Fewer 401(k) Loans at Small Companies with ESPPs

Specifically, the Fidelity study noted that at small companies (with fewer than 500 employees) that had both options, only 9 percent of employees took out new 401(k) loans when an ESPP was also available. At smaller companies with only a 401(k) option, 14 percent had taken 401(k) plan loans. In addition, the outstanding loan rate at these small companies was “significantly” lower, with 14 percent having an outstanding loan balance when both borrowing options were available, versus 23 percent with current loan balances at 401(k)-loan-only companies.

Employees at large companies (defined as more than 10,000 employees) with both an ESPP and a 401(k) loan option borrowed an average of $2,000 less than workers at companies where they could borrow solely from their 401(k) account. The employees with two options also held an outstanding loan balance that was on average $3,000 less than those with loans taken at employers offering only 401(k) account loans.

“Company stock, which is often purchased at a discount and is kept in an account outside of an employee’s 401(k) account, can be cashed in without the risks and tax implications sometimes associated with tapping a 401(k) account and the money does not have to be repaid if an employee changes jobs,” said Kevin Barry, executive vice president, Stock Plan Services at Fidelity in a news release.

To read the complete story on Thompson’s HR Compliance Expert, click here.

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