An Empirical Analysis of 401(k) Loan Defaults

Timothy Lu, Olivia S. Mitchell, and Stephen P. Utkus

Abstract —Many 401(k) pensions allow plan participants access to their pension saving before retirement via a plan loan. This paper investigates the determinants of defaults on such loans, using a rich dataset of over 100,000 participants who terminate employment with a plan loan outstanding. Overall, one in ten plan loans results in a default, and eight of ten workers who leave a job with a plan loan outstanding then default on that loan. Explanations relate to employee characteristics and plan design features: those with little non-retirement wealth, low income, and smaller 401(k) balances, are more likely to default than repay their loans at job termination. Moreover, borrowers with several smaller loans are more likely to default than are participants with a single loan of the same total size, perhaps due to heterogeneity in credit demand or lack of self-control. Local economic conditions have little impact on 401(k) loan defaults during the period we analyze.