Kate O'Sullivan, CFO Magazine
November 1, 2008

Loans Over Withdrawals

I am more concerned about some of the recent discussions and suggestions to:
(1) Curtail access to monies using 401k loans, while
(2) Encouraging withdrawals by waiving the 10% early distribution tax penalty.

Modest access and careful, deliberate use of loans can help people save for retirement. Research from the Boston College Center for Retirement Research shows that participation declines where access to funds is limited.

Don?t forget, the participant must first save to qualify for a loan. Most people I know disciplined enough to save, to defer consumption, are also circumspect about their saving.

We would be better served if we encouraged people to save more than they otherwise feel they can afford to earmark for retirement. Enable access to monies for short term needs via a modest loan program. Save, borrow, continue your contributions, repay the loan, rebuild your account to an even greater balance. Save, borrow, contribute, repay, rebuild. Repeat, over and over - ultimately building your retirement savings.

Many plans allow post-employment repayment. Some plans, like my plan, even allow participants to initiate a loan after termination. It is more of a lifetime financial instrument.

The priority here should be to ensure loans are considerably more attractive than withdrawals and to update loan processing to 21st Century standards to foster repayment.

Posted by Jack Towarnicky | Nov 6, 2008 5:46 PM ET