Keywords

401(k) loans, liquidity constraints, asset accumulation

Abstract

Although the popular press and politicians often describe 401(k) loans as a problem, classical economic theory has a more benign view. Loans from a 401(k) can relax liquidity constraints and increase household utility. Moreover, loan provisions may have the subtle effect of raising net asset accumulation by making 401(k) participation more appealing: employees who can access their 401(k) assets if they need them may be willing to put more money into an otherwise illiquid 401(k) account. Our research suggests that 401(k) loans are neither a blessing nor a bogeyman. Conditional on borrowing to finance consumption, we show that a 401(k) loan may be a reasonable source of credit in many circumstances. We further show that the net impact of 401(k) loans on asset accumulation is likely to be small (and could be either positive or negative) for a reasonable range of parameter assumptions.

Original Publication Citation

“The Impact of 401(k) Loans on Saving.” 2010 (with John Beshears, James J. Choi and David Laibson).

Document Type

Peer-Reviewed Article

Publication Date

2010

Publisher

National Bureau of Economic Research

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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