Extended 401(k) Loan Repayment Isn’t Stopping Loan Leakage

In their latest “How America Saves” report, Vanguard highlights that only 4% of participants terminating with an outstanding loan are using ACH repayment. Some in the industry are citing extended repayment as a way to prevent loan defaults—but this minimal uptake suggests limited impact. While allowing participants to continue to make loan repayments after termination might suffice for voluntary job changers, it’s not likely to be effective for those who lose their jobs involuntarily. To help preserve retirement security for those most at risk financially—and to reduce fiduciary risk—sponsors should also consider a more effective safety net, such as loan insurance.

Vanguard

“…29% of plan sponsors permit participants terminating with an outstanding loan to continue to repay the loan. Only 4% of participants terminating with an outstanding loan take advantage of the feature.” -Vanguard, “How America Saves,” 2019

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