July 27, 2012
--- The summer
brings higher temperatures—and according to benchmarking data from Charles
Schwab, it also brings a higher rate of 401(k) loans.
Requests for 401(k) loans jump about 16% from June to
August, Charles Schwab found. To add to the problem, many borrowers are unable
to repay the loans.
Catherine Golladay, Schwab vice president of Participant
Services, told PLANADVISER this increase in 401(k) loans in the summer
seems unrelated to economic downturn. Charles Schwab has been tracking this
loan data since 2005, and Golladay said the 16% rate has remained the same on
College funding is one main reason participants take 401(k)
loans in the summer, Golladay explained. Another reason is cash flow, as participants
may have used their income tax refunds to bridge a gap earlier in the year and
need additional funds in summer.
While taking out a 401(k) loan may seems like a quick an
effective fix, Golladay cautioned that doing so can cause many long-term financial
While people repay their loans, they usually stop
contributing to their 401(k) plans. “When you’re taking a loan from your 401(k)
plan, many times it’s because you’ve got challenges with cash flow,” Golladay
Loans are paid back into a 401(k) with after-tax money,
which ends up getting taxed again when it is withdrawn at retirement.
Essentially, Golladay explained, participants will be double taxed. “It really
does have what could be a devastating effect on your account,” she added.