Borrowing from yourself: 401(k) loans and household balance sheets

We examine 401(k) borrowing since 1992 and identify a puzzle: despite potential gains from borrowing against 401(k) assets instead of from other sources, most eligible households eschew 401(k) loans, including many who carry relatively expensive balances on credit cards and auto loans. We estimate that households with access to 401(k) loans could have saved about $3.3 billion in 2004--about $200 per household--by shifting debt to 401(k) loans. We find that liquidity constrained households are most likely to borrow against their accounts; however, the fastest growth has been among higher income, less liquidity constrained households. From 1992 to 2004, we do not find significantly different growth in wealth between households eligible for loans and those ineligible for loans. The recent tightening of terms and standards in mortgage and consumer lending has likely increased 401(k) borrowing, which could improve household balance sheets, if handled correctly. However, the improvement could be short-lived if the economic downturn leads to reduced contributions or significantly higher 401(k) loan defaults.