Moneta Group

High unemployment, rising credit card debt, restrictive lending and a sluggish economy have many people looking for a quick cash option.  A research study authored by Brigitte C. Madrian, John Beshears, James J. Choi and David Laibson, “The Availability and Utilization of Plan Loans,” (HKS Faculty Research Working Paper Series RWP11-023, June 2011) reveals that loan provisions are included in 90 percent of 401(k) plans. 

Additionally, more than 1 in 5 participants have taken loans from their plans at one time or another and, over a 7-year period from 2002 to 2008, almost half of all participants borrowed from their plans. Based on this surprisingly high use of 401(k) plan loans, an obvious question arises: Is this really a good idea?  As with all financial decisions, individual needs and circumstances must be considered. But certainly there are important considerations anyone should understand before taking a loan from a 401(k) plan.

With returns on 401(k) / 403(b) plans declining significantly over the last twelve months, it is more important than ever to focus on the expenses charged by fund managers (e.g., the fund’s expense ratio) and those administering the plan. While expenses are only one of many factors to weigh when making fund choices, expenses directly impact fund performance. The lower a fund’s embedded expense, the more of the return gets passed along to you.