Vanguard: Blacks and Hispanics More Likely to Borrow from 401(k), But at Roughly Same Dollar Amount as Whites and Asians; Vanguard Recommends Limiting Plan Loans for All Participants

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Vanguard: blacks and Hispanics take more loans and hardship withdrawals from their 401(k) accounts than whites and Asians. But they borrow only slightly more, so all four groups put similar assets at risk.

New Vanguard research, a second report in a series on diversity and retirement savings, indicates that blacks and Hispanics are more likely to take loans and hardship withdrawals from their 401(k) plan accounts than whites and Asians. At the same time, blacks and Hispanics borrow only slightly more of their retirement account balance, so members of all four groups put roughly the same amount of their assets at risk by borrowing from their retirement plan.

The study, Diversity and Defined Contribution Plans: Loans and Hardship Withdrawals, also notes that a 401(k) loan feature encourages some people to participate and save in their 401(k) plan. Thus, employees who participate in a plan and take a loan or hardship withdrawal are likely to be better prepared for retirement than their fellow workers who don’t participate and have no retirement plan savings.

Borrowing from a 401(k) plan does raise the potential concern that monies intended for retirement may be diverted to other purposes. The researchers suggest that plan sponsors who are concerned about this risk can take steps to reduce 401(k) borrowing.

“The incidence of 401(k) loans is significantly higher in plans that allow multiple loans. As a best practice, sponsors should consider limiting participants to one loan outstanding and/or other modest borrowing restrictions. This strategy appears to reduce borrowing levels across all participants and all racial and ethnic groups,” said Cyndy Pagliaro, a Vanguard researcher and lead author of the report.

Loans from 401(k) plan accounts, which are generally limited to half of a participant’s account balance (up to a maximum of $50,000), must be repaid via payroll deduction, so the money is eventually replaced unless the participant leaves the company and defaults on the outstanding loan balance. Blacks in the study were 55% more likely to take a loan than whites or Asians. Hispanics were about one third more likely to take a loan. However, the amount borrowed was only slightly higher among blacks, Hispanics and Asians than whites. There were no meaningful differences in loan default rates among the groups.

Hardship withdrawals are generally limited to an employee’s contributions and must typically meet certain criteria, such as an eviction or foreclosure notice, certain medical expenses and similar criteria. Unlike loans, they do not have to be repaid and thus represent a known reduction in a participant’s retirement assets. Blacks were almost twice as likely to take a hardship withdrawal as whites, but withdrew around 3.5 percentage points less of their account balance than whites and Hispanics. Asians were excluded from the hardship withdrawal analysis because they took so few that the sample size was not meaningful. Hispanics were about one third more likely to take hardships as whites, and withdrew a similar fraction of their account balance as whites.

The researchers noted that these behavioral differences in borrowing and hardship withdrawals may reflect other factors they could not measure among the groups—such as differences in financial literacy, trust in financial institutions, or restricted access to credit outside the plan.

The study looked at 2010 data for almost a quarter million participants in seven large DC plans recordkept at Vanguard. One of the plans restricts participants to a single loan while the others allow two or three loans at one time. Conforming to Internal Revenue Service hardship definitions, each plan allows participants early withdrawals because of financial hardship. The study is the second in a series on workforce diversity and retirement savings; the first focused on automatic plan enrollment.

Diversity and Defined Contribution Plans: Loans and Hardship Withdrawals:

Diversity and Defined Contribution Plans: The Role of Automatic Plan Features

About Vanguard
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies. Vanguard manages more than $1.8 trillion in U.S. mutual fund assets, including more than $200 billion in ETF assets. Vanguard offers more than 170 index and actively managed funds to U.S. investors and more than 60 additional funds in non-U.S. markets. Vanguard provides investments to more than 8,500 defined contribution plans, including recordkeeping and investment services to more than 3.4 million participants in nearly 2,400 plans. Vanguard is also a major provider of investment, advisory, and recordkeeping services to defined benefit plans. For more information, please visit

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All Vanguard asset figures are as of March 31, 2012, unless otherwise noted.

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