401(k) Loans Linked to Rising Health Care Costs Among Older Americans

A recent Employee Benefits Research Institute (EBRI) brief highlights that 51% of households with retirement plan participants taking 401(k) loans in 2021 and 2022 experienced at least a 10% increase in health care expenditures during the year of the loan. Comparatively, nearly 48% of households without such loans reported similar spending rises, indicating a correlation between loan activity and higher health care costs. The study suggests that these loans are often used as a source of liquidity to manage unexpected or anticipated health expenses, especially among participants aged 50 or older and those with higher credit card utilization, a marker of financial stress. The research shows that plan loans are more frequently adopted by those with moderate to large account balances, specifically accounts exceeding $10,000, rather than the smallest balances. Loan usage does not significantly differ across income groups, with roughly 9% to 10% of participants in each bracket taking loans. Notably, households with high credit card debt contributed less to their 401(k) plans, reducing their overall retirement savings accumulation. EBRI's spending composition analysis revealed that beyond health care, households taking loans saw increased allocation toward cash spending and housing expenses, suggesting loans may serve varied urgent financial needs. The distinction between planned housing-related expenses, like down payments, and more unpredictable health care costs underscores the reactive use of retirement funds for medical needs. The findings align with prior research indicating that 401(k) and IRA funds frequently function as emergency reserves rather than dedicated retirement resources. Economic shocks such as health crises and job losses are significant drivers of retirement fund withdrawals, disproportionately impacting lower-income workers. This dynamic emphasizes the dual role of defined contribution plans as both retirement and emergency savings vehicles. To mitigate reliance on retirement plan loans, EBRI recommends that plan sponsors promote alternative liquid savings avenues, such as health savings accounts (HSAs), flexible spending accounts (FSAs), and emergency savings accounts. Although restricting plan loans is not deemed a viable solution due to typically lower interest rates compared to credit cards, promoting diversified savings strategies may reduce participants' financial stress and reliance on retirement funds for health care costs.