Four ways for employers to not only reduce their potential risks, but also help employees become retirement ready.

When participants borrow from their retirement plans, they may be reducing their retirement income, while increasing your risk.

According to the Investment Company Institute, in 2018, 55 million Americans had retirement plans worth a total of $5.63 trillion. While this is impressive, the news may not be all good. About 19 percent of plan participants take loans from their retirement plans. And, in fact, the ability to borrow from retirement plans is part of what makes them attractive to employees. However, according to recent reports, unpaid loans and service distributions may be endangering the retirement readiness of employees.

Deloitte estimates that participants will default on $7.3 billion in loans in 2018 — and that this leakage will actually lead to nearly $2.5 trillion in retirement shortfalls over the next 10 years alone. This will have repercussions on employees and employers alike.

The Trillion-Dollar Shortfall

Employees may access their retirement accounts for a number of reasons, including:

  • Paying for medical expenses or other emergencies
  • Buying a home or paying for home renovations
  • Paying for college or paying off student loans
  • Paying down high-interest debt
  • Buying a car

While the majority of participants repay their loans with interest, it is estimated that about 10 percent default on the loans, which has tax consequences and other penalties if they are under age 59½. To make matters worse, those who default often decide to pull the rest of their balance out as well. These defaults and cash outs may have farther reaching effects than participants may understand. Consider that defaults and cash outs can have:

  • Tax consequences that may push the participant into a higher tax bracket
  • An additional 10percent financial penalty if the participant is under 59½ years of age
  • Opportunity costs for lost investment returns and lost compounding over time

According to the Deloitte study, these consequences are what will potentially lead to a $7.3 billion default to become $2.5 trillion in retirement shortfalls over the next decade.

Challenges for All

Loan defaults may have a significant impact on an employee's retirement readiness, potentially causing them to:

  • Not be ready for retirement when expected
  • Delay retirement
  • Be unable to generate enough retirement income

According to the U.S. Department of Labor, plan sponsors have an obligation to ensure that loans do not cause losses to the plan or impair an employee's ability to generate income. Additionally, they view loans as investments that require the same fiduciary oversight as other plan options. So, loan defaults can increase plan sponsor risk and add to fiduciary burdens.

What Can Employers Do?

There are ways for employers to not only reduce their potential risks, but also help employees become retirement ready. For example, employers may be able to leverage:

  • Educational programs that can help employees better understand the impact of unpaid loans, hardship withdrawals, and cash outs
  • Financial wellness programs that may help employees to better manage their finances and potentially avoid the situations that might cause them to need a loan
  • Different plan design options that may enable them to limit the number of loans or loan amounts
  • Plan sponsor tools that can help them complete their administrative tasks on time, while helping to ensure employees are paying back their loans on time

Go Deeper

Plan loan defaults can put participant retirement security and plan fiduciaries at risk. Read more about this.

ADP retirement plans make these plan features and tools available to employers. Learn more about our plans.


Unless otherwise disclosed or agreed to in writing with a client, ADP, LLC and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. Investment options are available for all "ADP Direct Products" through either ADP Broker-Dealer, Inc. (Member FINRA), an affiliate of ADP, LLC, (ADP BD) or (in the case of certain investments) ADP, LLC. Only licensed representatives of ADP BD or, in the case of certain products, of an external broker-dealer that has executed a marketing agreement with ADP, LLC, may offer and sell ADP retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement product. Nothing in these materials is intended to be, nor should be construed as, a recommendation for a particular situation or plan. Registered representatives of ADP BD do not offer investment, tax or legal advice to individuals. Please consult with your own advisors for such advice. ADPBD2019-0307-0681

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