Employee Stock Plans Provide 401(k) Loan Alternative

By Stephen Miller, CEBS Nov 18, 2014

Employees are less likely to take a loan from their 401(k) account if their company also offers an employee stock purchase plan (ESPP) that can be used as an alternative source of emergency cash, new research from Fidelity Investments shows.

In addition, employees with access to both an ESPP and a 401(k) tend to borrow a smaller amount from their 401(k), and had a lower outstanding loan amount.

Employees often reduce or stop saving in their 401(k) after taking out a 401(k) loan, which can significantly hinder their ability to reach their retirement savings goals. Company stock in an ESPP, which is often purchased at a discount and is kept in an account outside of an employee's 401(k), can be cashed in without the tax penalties associated with tapping a 401(k) account, and the money does not have to be repaid if an employee changes jobs.

Fewer and Smaller Loans

The analysis was conducted in May 2014 among Fidelity clients offering both and ESPP and a 401(k), representing 158 plans and 1.3 million active participants, as well as companies with only a 401(k), representing 183 plans and 1 million active participants.

While the effect of ESPPs on decreasing 401(k) loans was evident in companies of all sizes, the difference was notable in small companies (less than 500 employees), where only 9 percent of workers took out new 401(k) loans when an ESPP was also available, compared to 14 percent for employers that only offered a 401(k), Fidelity found.

The outstanding loan rate at small companies was also significantly lower, with only 14 percent of ESPP/401(k) workers having an outstanding 401(k) loan balance, compared with 23 percent of employees at 401(k)-only companies.

Employees at large companies (more than 10,000 employees) with both an ESPP and 401(k) borrowed an average of $2,000 less than employees with only a 401(k), and had an average outstanding loan balance of $3,000 less than employees without access to an ESPP.

"Savings in an employee stock purchase plan can present a viable option for workers who need to draw on their savings for financial purposes,” Kevin Barry, Fidelity’s executive vice president for stock plan services, told SHRM Online. While he encouraged employees to think twice before taking a 401(k) loan, he noted that “sometimes life events can create immediate financial needs,” leaving employees to find the least-worst borrowing option.

In a separate Fidelity survey conducted in early 2014 among 2,116 ESPP participants, 86 percent of respondents under the age of 40 said they would want their new employer to offer a company stock plan if they changed jobs, and 40 percent of ESPP participants overall considered a company stock plan as a "must have" benefit when making a decision to change employers.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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