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Chao: Americans Need 401(k) Loan Insurance Chao: Americans Need 401(k) Loan Insurance

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Chao: Americans Need 401(k) Loan Insurance

June 7, 2011

American families lose billions in retirement savings each year due to defaulting on 401(k) loans, says former Labor Secretary Elaine Chao.

Over the past 30 years, 401(k) savings accounts have become more prevalent in the United States. With the passage of the Pension Protection Act of 2006, contributing to 401(k)s became easier and more families joined. Though the retirement planning program is intended to help families prepare for the future, it also includes a provision to borrow to pay for things right now.

What families don’t know is that borrowing from a 401(k) could come back to hurt them well before retirement.

 

In a Roll Call op-ed, Chao said millions of people borrowing from their plans are unaware of the effects of borrowing and failing to repay.

According to Fidelity Investments, 22 percent of 401(k) participants have outstanding loans from their accounts. It is projected that 30 million loans, totaling nearly $350 billion, will be outstanding by 2014.

“Many of these millions of borrowers are unaware that in the event of death or disability, the loan is considered to be in default if not repaid within 60 days,” Chao wrote. “This might seem a negligible risk, but the Social Security Administration reports three in 10 workers will eventually suffer such a setback.”

Under one of the proposed changes to the retirement savings system, participants would be automatically enrolled in a loan insurance program. With this insurance if the participant dies or becomes disabled the loan would be paid by the insurance company.

In May, Sens. Herb Kohl, D-Wis., and Mike Enzi, R-Wyo., introduced a bill that would make it more difficult for participants to take out loans but would also extend the 60-day default period for loan repayment.

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