DC plan loan usage could suggest cash flow issues, advisors warned

Clients using defined contribution plan loans may have deeper cash flow stress, according to a new report.

The analysis from EBRI in collaboration with JPMorgan Asset Management reveals that when households tap into defined contribution plan loans, they’re far more likely to channel the funds toward housing or health care than to discretionary categories.

The report, titled “Where Are Households … Spend Defined Contribution Plan Loans,” draws on plan and survey data to map how borrowers actually use those funds and notes that “loan proceeds are disproportionately spent on housing, health care, and other essential outlays rather than travel or entertainment.”

Many participants appear to treat DC loans as a fallback to cover core expenses rather than a convenient liquidity option for leisure. The research suggests a correlation between borrowing and financial fragility with those taking loans more likely to be experiencing pressure from non-discretionary spending shocks.

In effect, plan loans may mask underlying gaps in emergency savings, exposing clients to retirement leakage and compounding risk. And EBRI highlights options that can be used for healthcare or housing without negatively impacting retirement planning.

“Without the option of taking a plan loan, participants would seek loans outside the plan to fill spending gaps, and those loans may have terms more expensive than those of a plan loan,” says Craig Copeland, director, Wealth Benefits Research, EBRI. “Yet, having liquid accounts, such as health savings accounts and emergency savings accounts that can provide funds for health care or housing, could help limit DC plan participants’ need to tap into their retirement savings accounts when faced with health events or when investing in or repairing their homes.”

Key findings

The EBRI report found that 10.9% of public-sector DC plan participants with loan access took a plan loan during the study year. Borrowing peaked among individuals in their 50s, with little variation by income level.

However, credit behavior was a strong factor as participants in households with high credit card utilization (80–100% of their limits) were nearly three times more likely to take a loan (19.8%) than those with no credit card debt (6.9%).

Almost 59% of households taking a new loan saw health care spending rise by more than 10%, compared to no significant differences in other spending categories like travel or entertainment. This trend was even stronger among financially stressed households age 50 and older, where 63.3% saw such an increase.

When analyzing changes in spending share, the largest jumps (over five percentage points) were in unspecified cash spending (24.9% of households), health care (23.3%), and housing (21%). Only housing and unspecified cash spending were more likely to rise among loan-takers compared to non-borrowers.

Households starting a new mortgage were also more likely to take a DC loan (15.6% vs. 10.7%), a relationship consistent across age groups. Conversely, among those who took a loan, 5.8% began a new mortgage that year versus 3.8% among non-borrowers.

Finally, participants in households with high credit card usage contributed less on average to their DC plans and consequently held lower account balances, except for those age 60 and above.