Defined Contribution Plan Loans: What You Need to Know

A new research report, “Where Are Households Spending Their Defined Contribution Plan Loans: An Examination of Public-Sector Participants,” published today by the Employee Benefit Research Institute (EBRI) and J.P. Morgan Asset Management found spending increases in many different categories among households with participants taking a defined contribution (DC) plan loan. Yet, healthcare and housing spending, particularly among the households starting a new mortgage, stood out as places where spending increases were more likely to occur than in households where a plan loan was not taken.

“Loan usage does not appear to be tied to spending on luxury items but has more to do with their healthcare or investing in a home. This supports that prohibiting plan loans would not necessarily improve participants’ retirement security, as the loan usage is more likely to help with expenses that would impact retirement—health and homes. Without the option of taking a plan loan, participants would seek loans outside the plan to fill spending gaps, and those loans may have terms more expensive than those of a plan loan,” said Craig Copeland, director, Wealth Benefits Research, EBRI. “Yet, having liquid accounts, such as health savings accounts and emergency savings accounts that can provide funds for health care or housing could help limit DC plan participants’ need to tap into their retirement savings accounts when faced with health events or when investing in or repairing their homes.”