How to Properly Use 401(k) Loans for Your Company

401(k) funding is a fantastic way to help ensure your employees are fully participating in your retirement savings program, because it allows them to rest assured they can access the savings in that fund if it becomes necessary. Unfortunately, administering the loans can be complex, and some employees will attempt to use them in ways that might endanger their retirement savings. If you’re considering offering 401(k) loans as a part of your program, there are a few best practices to make sure you do it in a way that is sustainable for your company and your employees.


The first step is finding out what level of support for this loan program you can expect from your 401(k) provider. If your provider only gives you limited support for these programs or actively discourages it, you might have to find a new 401(k) management company for your employee plans before you can offer loans with confidence. You might also find your provider is onboard, but your 401(k) plan lacks the broad-based funding necessary to support broad-based loan access. In those cases, it might be preferable to limit access to loans by making them available for certain purchases, like homes or vehicles, but not for general loans or credit consolidation.


Employee education is also integral to the success of your loan program. 401(k) funding should be a last resort option in most circumstances, not a choice that is made if the employee could access regular financing options. It can be used as a buttress to those options as well, but it is not typically designed to be an employee’s first option. That’s what basic credit resources are for. If your employees are not properly educated about their 401(k) financing options, they can put themselves into a credit cycle that compromises their retirement savings.


The best way to do this is by working with a provider who can give you strong financial wellness support in the forms of credit counseling, budgeting advice, and other educational resources your employees can use to get educated as they use the 401(k) loans to make purchases or repair their credit. This kind of wellness support is the single best way to make sure your employees use the available resources the right way, without threatening their long-term investments. Without this kind of support, you should at least limit loan accessibility if not eliminate it altogether. For more information about your financial health and wellness support options, talk to your provider about 401(k) funding.

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