Don’t Overlook the Hidden Cost of Borrowing from your 401k

The Coronavirus Stimulus Bill has created new exceptions that give 401k owners more favorable conditions to tap into their retirement accounts early, either for a loan or distribution. From increased loan limits to elimination of penalties, barriers are being removed to allow participants greater access to their 401k funds.

With greater access to their retirement accounts, participants may consider more strongly taking a loan from their 401k. But should they?

If a participant is in a position where they must take a loan, there are compelling arguments to strongly consider their 401k. The “paying yourself back” concept, a smoother approval process, favorable terms, etc. In other cases however, participants should understand the potential costs of borrowing from their retirement account.

And a significant and oft-underlooked cost is lost market return.

Of course, the burden of educating participants on 401k loan costs and benefits falls to their providers. While Cantina is obviously not a 401k provider, our Financial Services team has had the pleasure of consulting for many of the world’s most recognized providers over the years. If we were asked to help them quantify the opportunity cost of a 401k loan for their participants, we might propose something like this…