Project: Defaulting on Yourself: Who Loses at 401(k) Loans?

This research analyzes the advantages and disadvantages of the loan feature of 401(k) plans, particularly the extent of defaults, the conditions that lead to them, and their costs in terms of well-being in retirement.

Research team: Olivia S. Mitchell, Wharton School; Jun Timothy Lu, Wharton School; Gary Mottola, Vanguard; and Steve Utkus, Vanguard

While Congress intended 401(k) plans for long-term retirement purposes, it also authorized pre-retirement access to the savings in a variety of ways, including a loan feature. Although these features encourage greater contributions, they also have a potential disadvantage: the risk that participants will default on their loans and reduce their lifetime retirement accumulations. In an ongoing research collaboration, Wharton and Vanguard have built a massive database of more than 900 defined contribution plans with two million participants that has allowed researchers to analyze the behavior of millions of plan participants over several years. In this project, the research team will use this unique dataset to examine the pattern of 401(k) loan defaults: who defaults, how much this might cost them in terms of retirement wellbeing, and the features of the plans from which defaults occur. It will also identify economic variables, such as interest rates and unemployment rates, to establish whether micro or aggregate macroeconomic conditions drive defaults.