Alan Rappeport, CFO.com | US
December 5, 2007

Loan - yes, Withdrawal - No.

A number of studies show lower participation in plans without access (Munnell, Sunden and Taylor; Curme and Even). So, at least the money was contributed and is now available.

A major distinction is that loans must be repaid. So, access to loans need not erode retirement preparation, and a systematic use of loans to meet interim savings needs/goals may actually facilitate preparation for retirement.

Perhaps a first step should be to update 401(k) loan provisions to ensure loans are always superior to a withdrawal:
(1) It is long past time for Congress to update loan limits - 50% of vested balance to maximum of $50,000 less the highest outstanding loan balance over the last 12 months. The $50,000 limit goes back at least to the 1970's - a time when $50,000 was probably greater than almost every participant's balance.
(2) Use 21st century loan initiation and repayment capabilities - not so much to make access easier but to make repayment more likely:
(a) An ACH repayment process could provide access to loans and continued repayment even after employment ends,
(b) Consider changing the loan structure to a line-of-credit so the amount borrowed can match the current need.
(c) Use a true market rate to avoid lost or reduced earnings on investments.
(d) Expand to include home equity/residence loans - to qualify for tax deduction of the interest you pay to your account and to encourage saving in 401(k) plans to facilitate home purchase and, upon repayment, finance retirement.

Posted by Jack Towarnicky | Dec 11, 2007 11:18 AM ET

Lack of discipline

The increased dipping into plan assets is not the government's fault, nor the employer's nor the plan's. It's due to a lack of discipline by plan participants. We are encouraged to save more and more because it takes more and more to maintain a certain standard of living -- and people are all too ready to sue if they weren't *told* to save more. People know those funds are there for their retirement. The documents provided by the plan tell them that over and over again. The government has purposely made it difficult, in most cases, to get any money out of the plan. People are trying to pay mortgages and credit card bills *because they spent too much*. And that is no one's fault but their own.

Posted by Michael Steffens | Dec 6, 2007 3:15 PM ET

But it's "my money"

It should be of not surprise that there is an increase on withdrawals from 401(k) plans. After all, they were designed to allow "free" access to the funds, since the money after all, is "owned" by the employee himself. You cannot fault the poor souls that need the money and see the withdrawal as a quick and VERY easy solution to their financial problem. The only problem is....it should not be a solution, and for that I blame the designers of the retiremnt programs, the government, down to the employer who allows for withdrawals from the plans. Look, if employees can no longer depend on the old DB plans and know that they will have a stream of checks coming to them during their retirement years, and they are now supposed to become "savers" for their own financial future, then why is it that we allow them to "raid" their furture to begin with? In most cases, the reason for the withdrawal was so that they can but something they can ill afford, or it is to pay for debt already incurred. If they are in such bad financial shape, then what we might want to say to them is ...go a ahead and file bankruptcy and leave their 401(k) alone. I personally do not think that one is any worse than the other in the long term.

We keep incouraging employees to defer more and more of their wages into these plans while in the same breath, remind them that they can get at "their" money at any time (in the case of loans), and under certain circumstances (in the case of hardship). Instead, we should tell them to make certain that what they put in, they can afford, because once it is there, it is there until you are at lesat 55. No loans, No hardships!

Posted by Judith Wadsworth | Dec 6, 2007 2:35 PM ET