As 401(k) Use Grows, So Do the Loans Against Them

Your company is probably part of the majority of businesses that offers a retirement benefit to their workers. The increasing availability of these plans is an encouraging trend, but you’re likely already aware of another growing but much more disturbing trend: loans taken from 401(k)s. These are a big problem for your company and your workers, but they’re just a symptom of a deeper issue in the lives of your employees.

Over the past few years, the use of loans in company retirement plans has gone from bad to worse. Twenty-one percent of eligible participants are currently borrowing against their 401(k)s, and the average balance on those loans reached $9,820 in 2015. That’s especially devastating when you consider that 52% of American workers have less than $10,000 saved in company plans!

Clearly, this trend is destroying retirement. But if the loans aren’t the real problem, what is? The deeper trouble is the number of your workers who are in a desperate struggle just to get by. To paint the picture, 64% of Americans are unable to pay for a $1,000 emergency without borrowing money to cover it. And 70% of Americans are living paycheck to paycheck. That’s more than two-thirds of your team! And keep in mind that’s a lifestyle that applies across the range of incomes—even many top earners are spending most of their pay as soon as it is deposited.

The volume of 401(k) loans is evidence that your workers are tapping their nest eggs to cover emergencies because they have no other source of savings. And when the water heater goes out or a tire goes flat, they turn to the only place they know they have money: their retirement. That’s a bad plan for both them and your company.

This growing crisis is bound to have you looking for a solution for your team. While there’s no quick and easy fix, there is definitely something you can do to help.

First, realize that you can’t use a fire extinguisher to put out a building in flames. You need a larger-scale solution. The same is true of your workers and their financial wellness. They need a lot more than 401(k) advice—they need a drastic change in the way they handle money.

The only way to move ahead is by helping your workers get back to money basics so they can fix the real problems: the failure to budget and a lack of emergency savings.

A financial wellness program tailored to workers’ individual needs can address exactly those issues. The best program will be one that offers something more than just a budgeting tool. There are plenty of those tools out there, but they rarely see much use. Tools without inspiration are ineffective. They need an outcome-focused program that gives them the tools and motivation they need to make long-term financial changes like getting on a budget and working to eliminate debt. They need a program that gives them a step-by-step plan to work toward a more secure future.

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