401 (k) LOANS AND HOUSEHOLD BALANCE SHEETS

Abstract

We show in a simple model that households will choose 401(k) loans over other consumer loans if the opportunity cost of 401(k) loans-i.e., the foregone asset returns-is less than the cost of other loans, and that few households would carry high-cost consumer debt without fi rst utilizing 401(k) loans. Using data from the Survey of Consumer Finances, however, we fi nd that households typically turn to 401(k) loans only after utilizing more expensive credit.

The Availability and Utilization of 401(k) Loans

“…Li and Smith (2010) find similar variability in the reasons for 401(k) loan taking.27 Li and Smith (2010) argue that households could be even more aggressive in substituting 401(k) loans for other sources of credit. According to their estimates, such substitutions could save households with 401(k) loans available to them $200 to $275 per year on average.…”

Borrowing from the Future: 401(k) Plan Loans and Loan Defaults

“…17 Due to data limitation, we do not observe participants' education levels; Utkus and Young (2011) and Li and Smith (2010) find that higher educated individuals are less likely to take plan loans. 18 When a participant defaults on an outstanding loan, the default is typically recorded at the end of the quarter following the quarter in which the job termination occurs.…”

“…In other words, when the plan loan is exercised, the participant avoids paying current taxes as well as an early withdrawal penalty on the amount withdrawn from his pre-tax retirement account. Li and Smith (2010) show 8 Most loans are general purpose, with a maximum loan term of 60 months. Loans for purchase of a principal residence, which require documentary evidence of a home purchase, have a maximum term of 360 months.…”

“…Therefore we would anticipate a hump-shared age profile for borrowing (as in Beshears et al 2012) since the ability to borrow rises with age and salary, but the demand for plan borrowing falls with age. Li and Smith (2010) have also noted that liquidity-constrained households are more likely to rely on 401(k) borrowing. Using our much more extensive dataset, we examine the robustness of this finding.…”

Gamblers as Personal Finance Activists

“…We find that a one-standard-deviation increase in the current-permanent income gap, u i , is associated with a nearly 40% higher likelihood of being a gambler, whereas the imputed logarithm of permanent income, y i does not affect the likelihood of being a gambler. 18 In addition, we examine how gambling intensity (the dollar amount of gambling costs) varies with Y , the level of imputed permanent income, and Y − Y , with the same set of control variables. In this regression, we only use the gambler sample.…”