The Loan They Never Take May Make All the Difference

As a plan sponsor, you have the option to allow participant loans and hardship withdrawals in your 401(k) plan. While these features can make employees feel more comfortable enrolling, the potential impact on long-term savings cannot be ignored. Loans may discourage employees from deferring more funds, and defaults can further reduce retirement savings.

Considering Loan Limits

One approach is to limit loans to essential needs, like medical expenses, buying a primary home, or paying tuition. This strategy may prevent casual use of loans while still supporting employees in times of real financial need.

Understanding Hardship Withdrawals

Hardship withdrawals are early withdrawals that directly reduce an employee’s retirement account balance. Unlike loans, they do not require repayment, which can compromise long-term financial security. This reliance on retirement savings often stems from a lack of other emergency funds.

Building Financial Awareness

Encouraging employees to manage their budgets, plan for emergencies, and avoid unnecessary debt can help them feel more prepared to save consistently for retirement. Financial literacy can lead to greater confidence and a better financial future.

Let’s work together to educate and guide employees toward true financial wellness. The best outcome may be the loan they never take—potentially making all the difference in their retirement success.