Breaking into your 401(k) now could cause big problems when you want to retire.iStock

All it usually takes to borrow money from your 401(k) are a few clicks on a website, and a check will arrive a few days later. But workers who take out 401(k) loans risk not having enough saved for retirement because they miss out on growth while the money is borrowed. Some may also reduce their contributions or stop them altogether, research shows.

A warning to middle-age workers
Internal Revenue Service rules say you can borrow up to $50,000 or 50 percent of the account balance, whichever is greater. This ability to cash out some portion of your retirement account balance is unique to 401(k) plans. You cannot borrow against an Individual Retirement Account or a pension, for instance.

The problem is with middle-aged workers, who are the heaviest loan users, according data from the Employee Benefit Research Institute. "New employees won't notice, but sure as heck the older ones would notice it," says EBRI Research Director Jack VanDerhei.

Among developed countries with private retirement systems, the U.S. is alone in allowing basically unrestricted access to cash without providing proof of a hardship, according to a recent study led by Brigitte Madrian, a professor at Harvard's Kennedy School of Government.


Today's under-40 generation does not pay much attention to the details of retirement plans they get at work, and it is unlikely that any change would prompt them to start opting out in huge numbers, VanDerhei says.

Huge consequences
While it is alarmingly simple to borrow from your 401(k), borrowers may sometimes have to pay set-up fees. The low interest rate charged is actually credited back to your own account as you repay. The consequences in lost growth, however, can be monumental.

Fidelity Investments estimates that a person who takes one loan out --- the average balance they see is $9,000 --- is set back about 7.6 percent from his or her long-term retirement goal.

Half of Fidelity's borrowers end up with more than one loan. The real-dollar impact is between $180 and $650 a month in retirement, according to the company's estimates.

It is not just the loan balance that affects the retirement account. Of the 20 percent who borrow, Fidelity has found that 25 percent lower their savings rates within five years of taking a loan, and another 15 percent stop saving altogether while the debt is outstanding.

A direr problem is with those who have an outstanding balance when they lose or change jobs. They must repay their loans immediately or face tax penalties on top of credit problems.

"The vast majority of money is actually repaid, on the order of 85 percent of it," says Harvard's Madrian. "But for a smaller subset of people, it can be a problem."

Legislation to change 401(k) loan provisions is unlikely at this point, Madrian says.
"It would be easier if you had some companies get rid of the option and show the employees were better off," she said. "Absent some more compelling data, it's going to be hard to shift the policy landscape on that front."

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