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It is Not Borrow to Save, But Save to Borrow!

By Jack Towarnicky

Take action now by reviewing your retirement savings plan’s liquidity provisions.

To quote one benefits expert, “Borrowing to save—isn’t that something that only an oxymoron would do?”1   

I agree, and I disagree.    

The expert suggests your workers may be incurring high-cost debt in order to participate in employer-sponsored retirement savings plans – that foregone take home pay would be better used to:

  • Repay existing debts, and/or 
  • Avoid adding new, high-interest rate debt.2

He highlights the poor financial status of many American households. He suggests that retirement savings plans might be an “attractive nuisance” for many financially challenged workers.3 He argues that many workers would be better served by prioritizing repayment of outstanding debts over participating in a retirement savings plan – noting, for example, the current, industry-wide discussion of options to accommodate student loan debt.    

He cites data suggesting participants with financial emergencies may have to interrupt their retirement savings by taking a taxable distribution including:   

  • More than 40% of surveyed adults cannot meet a $400 emergency need with cash on hand,4 
  • In 2016, 43.9% of American households held credit card debt (up from 38.1% in 2013), with a median balance of $2,300, and an average balance of $5,700 (both down 3% from 2013),5 and
  • In 2016, 22.4% of American households had education debt (up from 20.0% in 2013), while the median balance was $19,000 and the average balance was $34,200 (both up 15% from 2013).6

I would add texture to the above data by highlighting three other considerations:

  • More than 70% of workers live paycheck-to-paycheck (they would have some or significant difficulty if a paycheck was delayed one week), even though more than 85% of eligible workers reported that they participate in their employer-sponsored retirement savings plan,7
  • Recent legislation enhanced the attractiveness of hardship withdrawals from retirement savings,8 and
  • Median tenure of workers ages 25- 34 is 2.8 years, while the median tenure of workers ages 25-64 is 5 years – this employment “churn” has remained unchanged throughout at least the past four decades.

To reduce “leakage” from retirement savings plans, some favor a solution involving creation of “sidecar accounts”10 – using automatic features to prompt saving in short term accounts. And, a week or so ago, the House of Representatives approved legislation to create tax-favored Universal Savings Accounts where assets would be available to meet financial emergencies.11

So, I agree. We need to reduce leakage. We need to avoid situations where retirement savings are transitory and payouts are subject to federal and state income taxes at high marginal rates, plus penalty taxes. It certainly would be a cruel hoax if plan designs incentivized retirement savings only to see all or most participants fail to vest in employer contributions and to see employee savings become highly-taxed leakage.      

However, I also disagree. It need not be. I also assert that sidecar accounts are suboptimal.  

It isn’t “borrow to save” but the contrapositive, “save to borrow!”

The Borrowing to Save article clearly highlights the need for plan sponsors to step up and, if necessary, redesign retirement savings plans to meet workers where they are – so those in debt and those living paycheck-to-paycheck can save for retirement, can receive the tax preferences and employer contributions, yet minimize leakage.13 Successful retirement preparation is much more difficult for workers who forego the tax preferences and employer financial support that is only available through a retirement savings plan.  

Wealth accumulation in the form of retirement savings won’t happen without liquidity for those workers who are in debt and/or who live paycheck-to-paycheck. Liquidity is possible without triggering leakage. Withdrawals are always leakage. Plan loans that are repaid are not leakage. Most plan loans are repaid. Most plan loans that become leakage are those outstanding upon termination of employment – so, change plan designs as necessary to facilitate repayment after separation.  

So, if your plan is “leaking,” consider design changes to:

  • Eliminate or curtail hardship and other pre-retirement withdrawals subject to penalty taxes so plan loans are participants’ sole or primary source of liquidity. 
  • Redesign plan loans to maintain the asset allocation, to use electronic banking and to deploy a “line-of-credit” structure14, and highlight the superiority of plan loans over withdrawals. Also ensure that:
    - The plan loan is treated as part of the participant’s fixed income asset allocation,
    - Liquidity is maintained even after separation, so participants can continue to retire existing debts or meet financial emergencies without triggering leakage, and 
    - Plan loans are almost always repaid, even if outstanding at separation.  

Take action now, today, to ensure that your plan provisions don’t inadvertently discourage plan loans in favor of highly taxed, pre-retirement withdrawals, highly taxed post-separation, pre-retirement distributions, or higher cost debt solutions outside the plan. 

1M. Barry, Borrowing to Save,, 8/3/18, Accessed 9/28/18 at:  
2Federal Reserve Bank of St. Louis, credit card rates in May 2018 = 14.14%, 7/9/18, Accessed 9/28/18 at: See also:  Federal Reserve Bank of St. Louis, typical payday loan annual percentage rate = 391%, Payday Loans: Time for Review, 2014, Accessed 9/28/18 at:  
3Cornell, Legal Information Institute, Accessed 9/28/18 at:  
4Federal Reserve System Board of Governors, Report on the Economic Well-Being of U.S. Households in 2017, May 2018, Accessed 9/28/18 at:  
5Federal Reserve Bulletin, Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey ofConsumer Finances, September 2017, Accessed 9/28/18 at:  
6Federal Reserve Bulletin, Note 3, Supra 
7American Payroll Association, Employees in America Living Paycheck to Paycheck Even After Tax Reform, Getting Paid in America, September 2018, Accessed 9/28/18 at: 
8J. Towarnicky, Hardship Withdrawals – An Attractive Nuisance Becomes More Attractive, 02/09/18; Accessed 9/28/18 at:  9Bureau of Labor Statistics, Table 1, 2018, Accessed 9/28/18 at: ; See also C. Copeland, “Employee Tenure Trends, 1983–2014”, February 2015, Accessed 9/28/18 at:
10I. Rademacher, Strengthening Financial Security Through Short-Term Savings Act, Aspen Institute, 7/17/18, Accessed 9/28/18 at:;But see:  J. Towarnicky, Sidecar = Suboptimal, 7/30/18, Accessed 9/28/18 at:  
11Family Savings Act of 2018, Accessed 9/28/18 at: 
12J. Towarnicky, Sidecar = Suboptimal, 7/30/18, Accessed 9/28/18 at:  
13J. Towarnicky, The 401(k) As A Lifetime Financial Wellness Instrument, April 2017, Accessed 9/28/18 at:   
14 J. Towarnicky, Qualified Plan Loans: Evil or Essential?, Benefits Quarterly, 2nd Quarter 2017, Accessed 9/28/18 at: 

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