The real cost of loans
What employers and employees need to know about borrowing from workplace retirement plans
Many employees are tempted to borrow from their workplace retirement plans. But loan-eligible employees may not understand the true cost of borrowing against their nest eggs. Adding up those costs, two conclusions stand out. First, the younger the borrower, the greater the impact lost market opportunity has on retirement savings over time. Second, foregoing plan contributions during the loan period may result in a big retirement shortfall.
Employers and advisors should consider educating employees about the risks of taking loans from their workplace retirement plan accounts. They also can help employees calculate the savings gaps they could face as a result of borrowing from their long-term savings.
Key findings
- Taking a workplace retirement plan loan has less of an impact on retirement savings for older employees and employees that continue contributing to their workplace retirement plan.
- When considering a workplace retirement plan loan, employee separation needs to be part of the consideration.
- Employers may want to consider plan designs that include provisions to help employees pay back their loans after separation from their employer.
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