Recent Vanguard research on diversity and retirement savings concluded that African-Americans and Hispanics are more likely to take loans and hardship withdrawals from their 401(k) plan accounts than whites and Asians. Still, African-Americans and Hispanics borrow “only slightly more of their retirement account balance, so members of all four groups put roughly the same amount of their assets at risk by borrowing from their retirement plan,” the research study said.
The Vanguard study, “Diversity and Defined Contribution Plans: Loans and Hardship Withdrawals,” also notes that a 401(k)-loan feature encourages some people to participate and save in their 401(k) plan. “Thus, employees who participate in a plan and take a loan or hardship withdrawal are likely to be better prepared for retirement than their fellow workers who don’t participate and have no retirement plan savings,” the report explained.
Borrowing from a 401(k) plan does pose the risk that financial resources intended for retirement could get diverted to other purposes. The researchers suggest that plan sponsors who are concerned about this risk take steps to reduce 401(k) borrowing.
“The incidence of 401(k) loans is significantly higher in plans that allow multiple loans,” said Cyndy Pagliaro, a Vanguard researcher and lead author of the report, in a statement. “As a best practice, sponsors should consider limiting participants to one loan outstanding and/or other modest borrowing restrictions. This strategy appears to reduce borrowing levels across all participants and all racial and ethnic groups.”
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Loans from 401(k) plan accounts are generally limited to half of a participant’s account balance (up to a maximum of $50,000). They must be repaid via payroll deduction, in order for the funds to be replaced.
African-Americans in the study were 55% more likely to take a loan than whites or Asians. Hispanics were about one-third more likely to take a loan. Nonetheless, the amount borrowed was only slightly higher among blacks, Hispanics and Asians than whites. Also, there were no meaningful differences in loan default rates among the groups.