Having a program of loan insurance in place for defined contribution plan participants who borrow from their plans could dramatically increase the security of the nation’s retirement programs, says a study from the Employee Benefit Research Institute.
“The impact of loan defaults on retirement savings is significant when compared with the overall retirement deficit for all U.S. households,” EBRI said in a report, “The Impact of Adding an Automatically Enrolled Loan Protection Program to 401(k) Plans.”
According to EBRI’s analysis, preventing leakage from the system through a loan insurance program over a 40-year period would result in an increase in the present value of 401(k) and rollover IRA balances of $1.96 trillion for those simulated to have a loan default.
“This can go a long way to helping reduce the present value of retirement deficits for U.S. households,” according to Jack Van Derhai, the report’s author.
Research from Deloitte cited by EBRI and based on anecdotal data from record keepers conservatively estimated that 66% of participants who defaulted on their loan took their entire account balance.
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