Employee Stock Purchase Plans Can Reduce 401(k) Loans

Fiduciaries often cite asset leakage as a major challenge in running a 401(k) plan, but one provider says there may be a straightforward solution to slowing loan-related leakage.

And what is that solution? Offer a company stock plan, says Fidelity Investments. New research released by the firm finds a strong negative correlation between the availability of employer stock and the likelihood that an employee will take a loan from their 401(k) account. Not only that—those who do take a loan from their 401(k) account while also having access to an employee stock purchase plan (ESPP) tend to borrow a smaller amount. This class of borrowers also had a lower outstanding loan amount on average, the research shows.

While the positive impact of ESPPs on 401(k) loans was evident in companies of all sizes, Fidelity says the difference was striking in smaller companies (less than 500 employees), where only 9% of workers took out 401(k) loans when an ESPP was also available. This compares with 14% for smaller employers that only offer a 401(k). The outstanding loan rate at small companies was also significantly lower in Fidelity’s analysis, with only 14% of ESPP/401(k) workers having an outstanding 401(k) loan balance, compared with 23% of employees at 401(k)-only companies.

Large employers, defined here as those with more than 10,000 employees, can also expect a positive impact on 401(k) loan activity when as ESPP is offered, Fidelity says. Employees in this segment borrowed an average of $2,000 less than employees with only a 401(k) account, and had an average outstanding loan balance of $3,000 less than employees without access to an ESPP.

“While Fidelity encourages employees to think twice before taking a 401(k) loan, we understand that sometimes life events can create immediate financial needs,” says Kevin Barry, executive vice president, for stock plan services at Fidelity Investments. “Savings in an employee stock purchase plan can present a viable option for workers who need to draw on their savings for financial purposes.”

Barry explains that employer stock can often be purchased at a discount and is typically kept in an account outside of an employee’s 401(k) account. He adds that ESPP holdings usually can be cashed in without the risks and tax implications associated with tapping a 401(k) account—and the money does not have to be repaid if an employee changes jobs.

Fidelity says its research shows ESPPs continue to grow in popularity, both among employers and employees. Workers like them because ESPPs are often offered to employees as a complementary workplace savings vehicle to supplement their 401(k), and on the employer side, the accounts appear to be increasingly important among workers evaluating a new job opportunity.

Indeed, Fidelity says another survey it conducted recently reveals fully 86% of respondents under the age of 40 said they would want their new employer to offer a company stock plan if they changed jobs, and 40% of overall respondents consider a company stock plan as a “must have” benefit when making a decision to change employers.

“Employee stock purchase plans are a win/win for employers and employees,” Barry adds. “Employers utilize them to reward workers and encourage a sense of ownership in the company, while employees get an additional savings vehicle to help them reach their financial goals.”