As the economy struggles in recovery, more working Americans are making dicey moves to pluck cash from their 401(k) retirement accounts.
A record one in five employees sitting on these popular nest eggs had borrowed from accounts at the end of 2009. Recent reports show that number has continued to climb.
The money helps families cope with high-cost credit card debt and medical bills, fund educations and improve or buy homes.
Borrowing it, however, also can set personal finance traps.
The biggest risk for borrowers is getting laid off. That typically means the 401(k) loan has to be repaid promptly, even though the paychecks have stopped.
And an unpaid loan damages the worker's contribution to his retirement security even as the nation debates cutting future Social Security and Medicare benefits.
Workers have drawn millions of dollars out of their 401(k) accounts though loans, reports from their employers show.
"We have definitely seen an increase in the number of participant loans and participants who are requesting loans," said Greg Marx, benefits manager at Commerce Bancshares Inc.
Commerce employees owed their 401(k) accounts $8.6 million at the end of 2010, a 21 percent increase from 2008.
Data covering more than 20 million participants in 401(k) plans nationwide showed 21 percent had taken out loans against their accounts at the end of 2009, up from 18 percent in the three previous years.
It was the highest level ever found by the Employee Benefit Research Institute since it began collecting the information in 1996.
EBRI hasn't reported on last year yet, but companies that administer plans say they saw increases in 2010 on top of those in 2009.
Vanguard reported that 18 percent of the employees in 401(k) plans it administers had loans from their accounts at the end of 2010. That was up from 16 percent in each of the three previous years.
Aon Hewitt, which handles 401(k) plans for large companies, said 27.6 percent of those plans' participants had loans at the end of 2010. The number had risen steadily from 22.3 percent in 2007.
Experts struggle to explain the rise in borrowing since the financial crisis. They can only speculate because no one routinely collects the information to show why workers borrow or where the money goes.
The economy seems an obvious reason.
A 2008 survey by the Vanguard Group found that many borrowers used the money for bill consolidation and debt repayments. Vanguard has not repeated the survey.
Hard times certainly are behind hardship withdrawals from 401(k) plans tracked by Aon Hewitt. Half the employees listed avoiding eviction or foreclosure as the reason for the withdrawal.
Many families also have few other sources of credit. The financial crisis has made it tougher for homeowners to borrow against the equity in their house. Fallen home prices mean there also is less equity to borrow against.
"When you're squeezed for money, the places you can turn to, there aren't that many left," said Sandi Weaver at Financial Security Advisors in Prairie Village, Kan.
On the other hand, more loans might mean employees are gaining confidence.
Layoff fears may have abated in the last two years, making workers more convinced they'll keep their jobs long enough to pay off the 410(k) loan normally.
"A willingness to borrow is a willingness to spend," said Jean Young, senior research analyst at the Vanguard Group.
She pointed out that 401(k) borrowing among plans that Vanguard administers actually declined during the recession and financial crisis. The rise since then brought it back to 2005's levels.
A Vanguard report speculated that the housing market's sharp decline meant fewer workers were borrowing to make down payments on a house. Young said consumers also generally cut spending and increased their savings, making for fewer loans.
Although the causes remain clouded, experts do know that more workers are borrowing.
A 401(k) loan can be tempting.
Most employees covered by these retirement plans can borrow from their accounts for up to five years and repay it through automatic withholdings from their paychecks. The payments go into the employee's 401(k) account, which means the person is earning the interest on his own loan.
There are no credit checks, no credit scores. And because most 401(k) plans are administered over the Internet, there's no need to ask the boss.
"If you want a loan, you just go online and you get it. It's very simple," said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago. "You'll have a check in three days,"
The interest rate is typically the prime rate plus 1 percent — only 4.25 percent currently.
This is substantially lower than rates on credit cards and can reduce a family's debt burden.
"The people that we talk to, they get into credit card debt or medical debt," said Jana Root, community outreach director at Apprisen Financial Advocates, which provides consumer credit counseling in Kansas City. "They look at this as a resource to free up some of their monthly spending."
Repaying the loans has the added benefit that the payments, including the interest, go back into the employee's account.
Using a 401(k) loan to pay off credit cards won't help unless the credit cards disappear.
"It's really important if you take a withdrawal from your 401(k) that you ... set yourself up so that you're not accumulating more debt," Root said.
Details vary from plan to plan, which means an employee thinking of borrowing should first check on the interest rate, length of loans available, time to repay the loan after leaving the company and other information.
At Sprint Nextel Corp., for example, employees who leave their jobs willingly have to repay the entire loan within 60 days. But those who get laid off can keep making the normal payments until the loan is retired.
Typically, however, a 401(k) loan must be paid off within a few months regardless of why the borrower's job ended at the company sponsoring the 401(k) plan.
Too often, borrowers don't realize the risk.
"They find out the hard way," said Brian Watts, an investment consultant at PGN Financial Services LLC in Kansas City.
Watts has advised a few families that had taken out 401(k) loans to make ends meet when one spouse lost work.
"I'd prefer to look for money in other places first," he said, especially by cutting spending.
Understandably, about 80 percent of the borrowers who leave their jobs for whatever reason don't repay their loans.
And that hurts them doubly.
First, the unpaid loan balance becomes a withdrawal from the retirement plan, and that means Uncle Sam expects to collect income taxes on the unpaid balance. He also will assess a 10 percent penalty for withdrawing the money before retirement age.
One choice an employee has here is the option of cashing out part or all of the account's remaining balance when leaving the company. That would provide the cash to pay the taxes and penalty, which also would be due on the amount cashed out.
Advisers routinely tell clients to not take money out of these accounts when they change jobs. Better to avoid taxes and penalties by rolling over the balance into an individual retirement account or similar account. Some employers also allow former employees to remain in the company's 401(k) plan.
Cashing out might solve the taxes and penalties, but it also deals a blow to the employee's nest egg.
The financial cushion that took years to build shrinks by the amount of the unpaid loan and any money taken out for penalties and taxes. More important, the employee loses all the money those dollars could have earned had they been invested in the plan until their retirement.
"It's understandable why they do it, but it's not necessarily a great idea," said Ken Eaton, a financial adviser with Stepp & Rothwell in Overland Park, Kan.