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my research in this area has been
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focusing on loans that people take from
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their 401K pension
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plans uh it's quite common for employers
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to allow loans from the pensions and in
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fact we find that at any given time
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about oneth of all workers have taken a
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loan over a 5-year period as many as 40%
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take loans so it is a common practice
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we've investigated why people take loans
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what happens when they do and in
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particular what happens when they
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terminate their jobs at that point they
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have to pay back their loans in full or
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incur a big tax penalty plus a 10%
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penalty so we're concerned about whether
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people are you using their 401ks as
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piggy
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banks what we found was that that planed
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loans are very widespread many people
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take multiple loans that the loans are
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usually repaid except in the event of
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people terminating their jobs so we
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conclude from this that 401K plans
00:01:19
obviously are intended to support
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retirement saving but they're also used
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as a form of support for pre-retirement
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consumption
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the key takeaways of the research have
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to do with the way 401K plans are
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designed and how plan sponsors construct
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them so it's very common for plans to
00:01:47
allow loans in fact I didn't even know
00:01:49
that our own company allows plan loans
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before I started the research um
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employers need not permit the loans but
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if they do they have to think carefully
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about constructing the environment in
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which people do take the loans for
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example um what's the interest rate
00:02:10
people have to pay back to themselves
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the loans plus interest what is the
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potential for taking out multiple loans
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what we found was that if people are
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permitted to take multiple loans they
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are more likely to borrow and they
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borrow double the amount
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all those decisions are up to plan
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sponsors who need to think carefully how
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they structure the 401K environment for
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their
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employees when I started on this
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research I had no idea that 401k loans
00:02:47
were so
00:02:49
widespread um what didn't surprise me
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was that people most likely to borrow
00:02:55
from their retirement accounts are young
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people low paid people people who are
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likely to be liquidity
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constrained uh what didn't what did
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surprise me was that so many people
00:03:07
default on their loans at the point of
00:03:09
job termination and it's expensive to
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default you have to pay income tax plus
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the tax penalty I think most people
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don't realize how big uh a burden that
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can be so we need to get the word out in
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terms of the cost of defaulting on the
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loans
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some in policy circles have suggested
00:03:35
that loans should be completely
00:03:38
outlawed that is that workers should be
00:03:41
encouraged to save in their 401K plans
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but they should be prohibited from
00:03:45
borrowing at all I think that's the
00:03:48
wrong message because employers
00:03:52
understand if they're going to encourage
00:03:55
the workers to contribute to their plans
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and the workers are low paid they need
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to have the confidence and the
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flexibility to be able to borrow if they
00:04:04
get into a pinch I think the right
00:04:07
message is that loans can be structured
00:04:11
judiciously and
00:04:13
thoughtfully um and that the way they're
00:04:15
structured makes a big difference to
00:04:17
employee
00:04:21
Behavior as a result of my research
00:04:24
several conclusions follow uh plan
00:04:27
sponsors need to think carefully about
00:04:29
how they're allowing access to the plans
00:04:32
for example instead of allowing multiple
00:04:36
loans which seems to be taken by the
00:04:39
employees as an opportunity to borrow
00:04:43
maybe allow one loan at a time and maybe
00:04:46
potentially cap the amount that can be
00:04:48
borrowed at a time um so that people
00:04:51
have the access in the event of hardship
00:04:53
and and need but they're not necessarily
00:04:56
seeing it as a revolving credit card
00:05:03
there's been a lot of attention
00:05:05
especially since the financial crisis
00:05:08
about Americans need to save more their
00:05:11
need to set aside more for retirement
00:05:15
and I think my research falls directly
00:05:17
into this uh interest area there has
00:05:21
been substantial policy attention to
00:05:24
encouraging saving through
00:05:26
401ks tax qualified accounts there's
00:05:30
been a lot of attention to automatic
00:05:32
enrollment and automatic escalation
00:05:34
where people boost their saving rates
00:05:36
over time there's been very little
00:05:39
attention to what we call the
00:05:41
decumulation phase that is how people
00:05:43
manage the money on the way out of their
00:05:46
pensions loans are part of it and also
00:05:49
payouts at retirement so that's I think
00:05:52
the real crying need for additional
00:05:55
analysis
00:06:00
there have been a number of research
00:06:03
studies recently arguing that people are
00:06:06
taking loans willy-nilly without paying
00:06:09
attention to the consequences and I do
00:06:12
believe that people need to be educated
00:06:16
much more about the fact that they pay
00:06:20
themselves back which is good but they
00:06:23
also forgo the opportunity to earn
00:06:26
investment earnings on the money that
00:06:28
they had borrowed along the way also
00:06:31
people are not particularly aware of the
00:06:34
financial consequences of taking that
00:06:37
alone particularly if they become
00:06:39
unemployed so both of those topics need
00:06:42
a lot more attention in the workplace as
00:06:45
well as in policy
00:06:51
circles we've been very fortunate over
00:06:54
the last many years to have a research
00:06:57
collaborator with the Vanguard group
00:06:59
which is a senior partner here at the
00:07:01
Wharton School Steve utkus who's A
00:07:03
Wharton grad by the way is the head of
00:07:06
the Retirement Research Center at
00:07:08
Vanguard and he and I have been working
00:07:11
on 401K plans and investment behavior
00:07:14
for several years This research was made
00:07:18
possible only because of the
00:07:20
collaboration with Vanguard which gave
00:07:23
us access under restricted conditions to
00:07:26
the 401K plans that they administer
00:07:34
retirement savings is a passion of mine
00:07:37
and retirement Security in particular We
00:07:40
are continuing to do research with
00:07:43
Vanguard on the 401K plan Marketplace
00:07:47
looking at for example um what happens
00:07:50
when companies introduce Target date
00:07:53
plans as investment options how do
00:07:56
people change their portfolios what
00:07:59
impact will this have on their future
00:08:01
returns and risks
00:08:05
[Music]
