Many American workers participate in company retirement plans, methodically contributing to their accounts over time to fund for life after work. Beyond benefiting from employer-funded plans, retirees commonly draw from additional savings tucked away in IRAs or after-tax savings accounts as well. Add Social Security payments to the mix and it should be a recipe for a secure retirement, right? While many retirees thoroughly plan for their retirement, the rising cost of living and unforeseen expenses can mean the retirement income may fall short of anticipated needs. The difference between your retirement income and actual expenses is known as your Retirement Income Gap.
For many years, plan sponsors have wrestled with the decision to offer loans to their plan participants. Some consider them to be a benefit and even promote them as a legal way to use tax free money while participating in the plan. According to the Employee Benefit Research Institute, 87% of plan participants can take a loan against their retirement account. Of those employees with access to take a loan, about one-fifth borrow against the retirement account. Come retirement, what are the effects of loans taken from pension funds on an employee's account?