Benefits of 401 (k) loan stress employees
Employers have become more concerned with the financial well-being of their employees by offering benefits including student loan repayments, financial counseling services and instant access to wages. But there is a benefit to financial well-being that can actually cause more stress for employees.
That benefit is the 401 (k) loan, which employers can offer their workforce in the event of a financial emergency. Indeed, 20% of all 401 (k) participants currently have an outstanding loan, according to data from Fidelity Investments. Yet the possibility of not being able to repay that loan increases employee stress, according to a new study from Custodia Financial and Greenwald & Associates. The study found that 91% of employees appreciate the ability to borrow as part of their 401 (k) plans, but 70% believe losing their job would make it harder to pay off a 401 (k) loan.
“401 (k) loans have their pros and cons. It makes sense if [employees] need short-term liquidity [and they] can pay off the loan in less than a year, ”says Deborah Badillo, a certified financial planner with Lubitz Financial Group. “401 (K) loans are better than a high interest payday loan. The only caveat is that if [employees] are made redundant [they] must repay the loan all at once, or it will be considered a taxable distribution.
According to the study, participants said they took out a 401 (k) loan for three main reasons. The first was to make ends meet (25%), the second to pay off credit card debt (23%), and the third to cover medical bills (22%). Employers are in a unique position to offer specific benefits that can help employees solve every problem – avoid 401 (k) loans and make their retirement savings work for the future.
“The survey data and participant interviews clearly show that 401 (k) borrowers are under considerable financial stress,” says Brian Perlman, senior vice president and head of financial services at Greenwald & Associates. “A woman I interviewed took a loan from her 401 (k) to help pay for medical bills related to her fibromyalgia. She was then forced to go on disability and defaulted on her loan. She – and everyone else involved – needs a better safety net. ”
Employees say they would feel more comfortable with a 401 (k) loan if employers provided a safety net. Automated loan insurance pays off a borrower’s outstanding balance if the employee is made redundant, disabled, or dies, preventing default. The average defaulting borrower loses $ 300,000 in retirement security when taxes, penalties, potential withdrawals and lost income are factored in, according to data from Deloitte.
Loan insurance could offer a solution, according to the study. A large majority of plan members find low-cost, automated loan insurance attractive, and more than half think their employer should add it. Additionally, 67% of plan members say they would consider contributing more to the plan if their employer added loan insurance.
While these methods can help ease the burden of repaying a 401 (k) loan, financial experts still generally advise against taking out a loan against a pension plan.
“Most financial advisers are tough enough to avoid 401 (k) loans,” says Jeffrey Edwards, certified financial planner and president of Atlas Financial Planning. “However, for the average worker, the 401 (k) is sometimes their biggest or their only asset. So there aren’t many options other than their retirement account.
Edwards has two rules for any employee who is considering borrowing on their 401 (k). The first is to remember that this is a short term loan that must be repaid quickly. If an employee can’t afford to repay, they shouldn’t take it. Second, the employees must make sure that they have job security to take out the loan.
“Yes [an employee] leaves or loses his job, they have two months to pay it off, ”says Edwards. “If you don’t have that security or that confidence, don’t take it.”
Financial concerns are the number one stressor in employee lives, according to data from professional services firm PwC. When asked what causes the most stress, more employees cite financial matters (59%) than any other life stressor combined. Educating employees on the best way to manage their finances could help alleviate some of this stress.
“The best thing employers can do is provide workplace financial education,” says William Brancaccio, a certified financial planner at Retirement Wealth Partners. “This lack of education leads to financial stress and loss of productivity. If employees learned financial literacy, they would likely understand the importance of an emergency fund, which can prevent 401 (k) loans.