A new financial product allows participants to use checks or a debit card to tap into their 401(k) account balance. This product is similar to a home-equity line of credit, except it uses the 401(k) account balance as the equity. The example in the article charges 2.9% above the prime rate. The prime rate interest is paid to the participant's account and the additional 2.9% interest is paid to the administrator of the loan program, who originates and collects the loan. The borrower also pays an initial set-up fee and a yearly maintenance fee to the recordkeeper.
This product makes it more convenient to take out a 401(k) loan. The article discusses the theory behind allowing 401(k) loans:
"Making it easier for 401(k) investors to borrow from their savings seems to run counter to the goal of helping workers build a nest egg for retirement. But most 401(k) plans do allow loans, in the belief that workers are more likely to participate if they can access their money prior to retirement. A 1997 study by the Government Accountability Office confirmed that allowing loans increases participation in 401(k)s, especially among lower-income employees, and it also concluded that employees in plans that permit loans contribute more.
A survey by the Profit Sharing/401k Council of America (PSCA) found that 85% of 401(k) plans allow loans, and about 25% of workers in those plans take them."
Here is a related blog post: Should I Borrow From My 401(k) Plan?
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