Myth 1
Myth 2
Data Shows:
Most loans are used responsibly to pay off debt and for essential expenses, while saving for retirement continues to be a priority.
Debt
Essential expenses
Medical expenses
Remodel/fix house
Mortgage/rent
Other expenses
Top reasons for taking a loan by generation
Saving for retirement is still a priority.
Participants borrowing from their account continue to save for retirement while paying back the loan.
A strong majority, 83%, continue contributing to their retirement account at the same deferral rate as before taking the loan, while only 4% stopped deferring.³
It’s a strong indication they’re able to manage their short-term financial needs while keeping their long-term retirement goals.
Principal Retirement Security Survey – Loans and Withdrawals 2023.
Deferral rate changes of those with a retirement loan
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0%
20%
30%
40%
50%
60%
70%
80%
Deferral stayed
the same
83%
Increased deferral rate
8%
Decreased deferral rate
7%
Stopped deferring
4%
Participants may changed referral rate more than one time in a calendar year.
Principal Retirement Security Survey – Loans and Withdrawals 2023. Data shown is from loan participants only.
Deferral rate changes
Reasons for loans
Myth 1:
401(k) borrowers are frivolously using the money without care for their retirement readiness.
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Myth 1
Myth 2
Myth 3
Myth 4
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Middle-age is when participants appear to borrow from their retirement account. At that life stage, financial obligations can accumulate with children’s college expenses, taking care of elderly parents, medical issues, etc.
By generation, the percentage of loans taken each year
5.1%
Baby Boomers
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Loan requests have increased
Record-breaking inflation has participants seeking loans, likely looking for quick access to low-risk money to meet short-term financial priorities.
Retirement research and insights
401(k) loans:
Debunking the myths
What if retirement loans are just misunderstood?
Read More
Putting 401(k) loan insights to work
Whether a plan has a loan provision, or a plan is thinking about adding one, the research reveals some key takeaways.
key takeaway 1
Loan provisions best practices:
•
Allow only one loan at a time.
•
Charge an interest rate that helps make up for potential lost market returns.
•
Set additional guardrails such as restricting the reasons for taking a loan to hardship reasons only, and limiting loans to come from certain investment options, such as participant deferrals only.
key takeaway 2
Considerations for plans that allow loans:
key takeaway 3
Considerations to modernize retirement plans with a financial wellness mindset:
•
Track plan health stats—keep an eye on participation rates, average account balances, abnormal increases in loan requests or defaults.
•
Track deferral rates—look for rates to stay mostly the same. Large decreases in rates are a warning sign.
•
Update plan design using loan provision best practices.
Paying off debt is the number one reason for borrowing money from a 401(k), and essential expenses is second, regardless of age, gender, race, or income.²
Budgets are maxed as the cost of basic necessities such as housing, food, and transportation increase.
The myths
2019
2020
2021
2022
8%
7%
8%
9%
2%
1%
7%
3%
Increase in loan requests from 2019 to 2022 at Principal , including the annual inflation rates.
Principal proprietary data, December 2022. U.S. Bureau of Labor Statistics, Annual inflation rates, 2019-2023.
Myth 2:
Loans are mostly taken by younger and lower income participants —using them like a revolving credit line.
Data Shows:
The average 401(k) borrower is age 43, and the research shows they evaluate the pros and cons before taking.
² Principal Retirement Security Survey – Loans and Withdrawals 2023.
Loan requests with inflation
Loan requests
Inflation
+ View loan requests with inflation chart
Discover more retirement research and thought leadership insights.
•
Match student loan debt repayments.
•
Support emergency savings.
•
Boost financial education.
10.3%
Gen X
10.0%
Millennials
5.6%
Gen Z
Percent of loans taken by Baby Boomers, Gen X, Millennials, and Gen Z.
Principal proprietary data, December 2022.
Participants of all income levels have taken 401(k) loans.
Data shows that the six-figure salary isn’t the wealth milestone it once was. Sixty-two percent of all Americans say they live paycheck to paycheck, including 48% of those earning more than $100K.⁴
Survey results show that over 50% of those taking loans with household income greater than $100K are using the loan money to pay off debt and pay for essential expenses. ⁵
⁴ PYMTS and LendingClub, New Reality Check: The Paycheck-to-Paycheck Report. March 2023.
⁵ Principal Retirement Security Survey – Loans and Withdrawals 2023. Data showing is from loan participants only.
By salary range, the percentage of loans taken each year
0%
5%
10%
15%
20%
25%
< $35,000
7%
Percent of loans taken by each salary segment: <$35K, $35K-$49K, $50K-$74K, $75K-$99K, >$100K.
Principal proprietary data, December 2022.
+ View Pros & Cons
$35,000 - $49,999
12%
$50,000 -
$74,999
11%
$75,000 -
$99,999
9%
> $100,000
11%
Baby Boomers
36%
18%
13%
Gen X
37%
18%
14%
Millennials
35%
23%
16%
Gen Z
39%
21%
11%
Debt
Essential expenses
Medical expenses
Mortgage/rent
Remodel/fix house
Other expense
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By salary
By generation
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- Close Pros & Cons
Borrowers understand the ramifications of defaulting on a retirement loan.
From the survey, 25% of participants with an outstanding loan balance say they’re concerned with the potential taxes and penalty tax on the remaining balance if a job loss occurs.
Percent of participants leaving their employer with an outstanding loan for years 2019 – 2022.
Principal proprietary data, December 2022.
* The slight increase in 2020 correlates with the increase in unemployment caused by the global pandemic.
Percentage of participants per plan leaving with an outstanding loan
2.0%
2019
2.5%
2020
1.8%
2021
1.5%
2022
Myth 3:
Many 401(k) borrowers will leave the company, defaulting on their loans.
Data Shows:
Those taking loans are typically more tenured and established employees and anticipate paying back the loan. Only a small percentage of those with loans leave their employer with an outstanding balance.
Myth 3
Pros
Interest rate lower than credit cards and most personal loans, including payday loans
47%
Faster access to money
45%
Interest paid back to my account
43%
Amount of money eligible to borrow
36%
Terms and conditions of the loan
32%
cons
Losing out on account market growth
30%
Loan payments made with after-tax dollars
21%
Taxes and penalties if unable to pay the loan back
19%
8%
Didn't consider the pros and cons before borrowing from their retirement account
Participant considerations before taking a retirement loan
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From the survey, 25% of participants with an outstanding loan balance say they’re concerned with the potential taxes and penalty tax on the remaining balance if a job loss occurs.
Read more
Plans that allow loans are more likely to also have automatic enrollment and see higher participation rates.⁶
While not a direct cause-and-effect relationship between loans and automated plan features, it appears there’s more emphasis on using plan design to encourage participation, including automatic enrollment, a stated match, and allowing loans.
While not a direct cause-and-effect relationship between loans and automated plan features, it appears there’s more emphasis on using plan design to encourage participation, including automatic enrollment, a stated match, and allowing loans.
Myth 4:
Allowing loans negatively impacts plan and participant outcomes.
Data Shows:
Plans that allow loans take a holistic view of plan features and can see positive participant behaviors.
Myth 4
⁶ Principal proprietary data, December 2022.
Top reasons include debt, essential expenses, mortgage/rent, medical expenses, remodel/fix house, and other expenses.
Principal Retirement Security Survey – Loans and Withdrawals 2023.
Plan specifics
Plans with automatic enrollment
29%
19%
Allows loans
Don't allow loans
Plans with employer match
39%
38%
Average plan participation rate
63%
60%
Average plan deferral rate
8.5%
8.4%
Research reveals an evolved perspective and approach to retirement loans. Using insights from the Principal Retirement Security Survey—Loans and Withdrawals 2023, and Principal proprietary 2022 data, some misconceptions were found about retirement plan loans.
Decreased deferral rate
7%
Stopped
deferring
4%
10%
Download full report (PDF)
Percentage of loans taken by each salary range
7%
< $35k
0%
5%
10%
15%
12%
$35,000 - $49,999
11%
$50,000 - $74,999
9%
$75,000 - $99,999
11%
> $100,000
Myth 2
Myth 3
Myth 4
Download full report (PDF)
1h 2023
5%
7%
2019
2020
2021
2022
1h 2023
8%
7%
8%
9%
5%
2%
1%
7%
7%
3%
Discover more retirement research and thought leadership insights.
Read more
Download full report (PDF)
Download the full report to learn more about 401(k) loans.
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Download the full report to learn more about 401(k) loans.
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Research reveals an evolved perspective and approach to retirement loans. Using insights from the Principal Retirement Security Survey—Loans and Withdrawals 2023, and Principal proprietary 2022 data, some misconceptions were found about retirement plan loans.