Why Employees Take 401(k) Loans and How Employers Can Help

Key Takeaways

• More employees are borrowing from retirement savings to address short-term financial needs.
• A 401(k) loan is often a symptom of broader financial stress and cash-flow challenges.
• Financial coaching can help employees evaluate alternatives and understand trade-offs.
• Employers can support retirement outcomes by addressing underlying financial challenges.
• Retirement education is most effective when paired with broader Financial Well-being support.

The Current State of Employee Financial Well-being in the U.S.

Many employees are trying to protect their long-term financial future while managing urgent short-term pressure. In Fidelity Workplace research, 77% of employees said inflation and the cost of living are causing them financial stress. Only about half of employees had at least three months of emergency savings, and that fell to less than one-third among employees living paycheck to paycheck.¹

That pressure is showing up in retirement accounts. Vanguard reported that 13% of participants had an outstanding 401(k) loan, with an average balance of $10,700, and hardship withdrawals rose to 3.6% of participants.² Fidelity also reported record-high early withdrawals from retirement plans, with 8.6% of employees making a hardship withdrawal in the prior year.¹

For employers and retirement plan administrators, the issue is not only whether employees understand the mechanics of a 401(k) loan. It is whether they have enough cash-flow stability to avoid using long-term savings as a short-term emergency fund.

What Employees Need, Employers Can Provide

The retirement challenge is real, but employees may not be able to focus on a future risk when today's bills are already crowding the kitchen table. When a household budget has little or no free cash flow, a 401(k) loan can feel less like a financial decision and more like the only door left unlocked.

MSA data continues to show the connection between retirement goals and day-to-day financial pressure. Among mid-career participants, 35% cited balancing retirement savings with other financial priorities as their most pressing challenge, while 16% cited managing debt.³ And MSA’s early-career retirement event data showed that nearly 1 in 4 attendees had less than one month of emergency savings, including 8% with no savings at all.⁴

That is where employers can make a meaningful difference.

Instead of waiting until employees have already borrowed from retirement savings, employers can promote financial coaching as part of benefits communications, retirement education, and life-event support.

401(k) Loans Are Often a Financial Stress Issue

A 401(k) loan is often a symptom of a larger financial challenge.

Employees may be dealing with:

• Limited emergency savings
• Rising debt balances
• Unexpected expenses
• Cash-flow shortages
• Competing financial priorities

This is why retirement planning and Financial Well-being are closely connected.

Unbiased Financial Well-being Services

A 401(k) loan might seem like a quick and easy solution to an immediate problem. Unfortunately, if the root cause of the problem isn't addressed, an employee might take more than one loan against their 401(k) savings (if allowed) or tap into other savings. All the while, controlling spending is the issue that actually needs to be addressed.

When an unbalanced budget threatens an employee's longer-term goals, such as saving for retirement, a Money Coach can help the employee evaluate current needs and immediate options, understand trade-offs, and build a realistic action plan.

Looking for ways to reduce employee financial stress before it affects retirement savings?

 

Learn how personalized Money Coaching and educational guidance can help employees navigate financial challenges and major financial decisions with confidence. Learn More About MSA

Step 1: Look at the Budget Problem Before the Loan

The first conversation should not start with the loan paperwork.

It should start with cash flow: what has changed, which bills are urgent, what resources are available, and whether the employee has other options that cause less long-term damage.

A Money Coach can help an employee assess options for regaining control of their household budget, including the pros and cons of each option from both short- and long-term perspectives.

Step 2: Educate the Employee on the Pros and Cons of 401(k) Loans

A 401(k) loan is not automatically the wrong choice, but it should be an informed one.

Potential Advantages

• Convenience: Requesting a loan is usually a simple process with minimal documentation required. Credit score is not a factor, and repayment is typically handled through payroll deduction.
• Interest expenses: The interest paid generally goes back into the employee's 401(k) account rather than to a lender. Most plans charge interest equal to the Prime Rate plus an additional 1-2%.
• Taxes: There are generally no taxes or early withdrawal penalties if the loan is repaid according to plan rules.
• Debt-to-income impact: A 401(k) loan generally does not affect an employee's debt-to-income ratio.

Potential Risks

• Job changes can accelerate repayment: If a borrower leaves an employer because of a layoff or a new opportunity, the loan may need to be repaid within a shortened time frame.
• Long-term retirement savings can suffer: Money borrowed from the account may miss out on potential investment growth. Lost earnings can affect the savings required later or the age at which an employee can afford to retire.
• Contributions may slow down: Some borrowers reduce or pause retirement contributions while making loan payments, which can compound the long-term impact.
• The root cause may remain: Tapping retirement savings can provide short-term relief, but if the household budget remains unstable, the employee may take a second loan or continue depleting other savings.

Step 3: Support Employees Regardless of the Action Plan They Pursue

The goal is not to make the decision for the employee. It is to help the employee understand the choice clearly and build a practical action plan for what comes next.

If an employee meets with a Money Coach and decides to take a 401(k) loan, at least they have explored some pros and cons of this action and know they have an unbiased resource they can use in the future. Most 401(k) loans have a repayment period of five years, and a lot can happen over that time frame.

An employer or plan administrator prioritizes employees’ well-being when they provide a resource that can be used at any time to address any new budget or financial challenge.

Beyond the Loan: Supporting Long-Term Financial Stability

Ongoing support matters because a 401(k) loan is often only one visible sign of a larger financial strain. Employees may also need help rebuilding emergency savings, adjusting spending, managing debt, restarting retirement contributions, or preparing for the next financial shock without returning to their retirement account.

Employers that take a broader Financial Well-being approach may be better positioned to help employees address both immediate challenges and long-term retirement goals.

Potential Benefits for Employers

Organizations that support employee Financial Well-being initiatives may experience benefits such as:

• Increased employee confidence
• Greater awareness of available resources
• Reduced financial stress
• Improved engagement with benefits and support programs
• A workforce that feels supported during financial challenges

Frequently Asked Questions

Why do employees take 401(k) loans?

Employees often use 401(k) loans to address immediate financial needs such as unexpected expenses, debt obligations, home repairs, or cash-flow challenges.

Are 401(k) loans bad for retirement savings?

A 401(k) loan may affect long-term retirement growth because borrowed funds are no longer invested during the repayment period.

How can employers help employees avoid 401(k) loans?

Employers can provide financial education, coaching, budgeting resources, debt management support, and broader Financial Well-being initiatives.

What role does financial coaching play?

Financial coaching can help employees evaluate options, understand trade-offs, and develop action plans aligned with both short-term and long-term goals.

Next Steps for Employers, EAPs, and PEOs

• Review retirement plan utilization trends within your workforce.
• Evaluate how financial stress may be affecting retirement outcomes.
• Identify opportunities to strengthen financial education and coaching resources.
• Consider how emergency savings, spending habits, and debt management support fit into your broader strategy.
• Reinforce Financial Well-being education throughout the year.

Help Employees Make More Informed Retirement Decisions

When employees borrow from retirement savings, the real issue is often bigger than the loan itself. It may be a budget shortfall, an emergency savings gap, rising debt, or uncertainty about how to prioritize competing financial goals.

Employers, EAPs, and PEOs can help by connecting employees to educational guidance and personalized Money Coaching before, during, and after major financial decisions.

Learn how MSA helps employees address financial challenges that may affect retirement savings, long-term goals, and overall Financial Well-being.

¹ Fidelity Workplace. 2025 Workplace Outlook Perspectives for Talent and Benefits Leaders, fidelityworkplace.com/s/benefits-leaders-trends. Accessed March 14, 2025.

² Vanguard. How America Saves 2024, institutional.vanguard.com/insights-and-research/report/how-america-saves. Accessed March 14, 2025.

³ My Secure Advantage, Inc. June 2025. Based on MSA member self-reported live event data. 2,358 responses.

⁴ My Secure Advantage, Inc. May 2025. Based on MSA member self-reported live event data. 2,446 responses.