New proposal would limit 401(k) borrowing


A bipartisan plan from two senators aims to limit people borrowing from 401(k) plans as a way to protect Americans’ retirement savings.

The Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (SEAL Act) has been introduced by Senators Herb Kohl (D-Wisconsin) and Mike Enzi (R-Wyoming). Fancy that, a Republican and a Democrat actually working together. It’s a real throwback to the old days!

I like the SEAL Act, but I don’t think it goes far enough. It would just set strict limits on borrowing, but still allow it.

You may have heard me from time to time talk about a radical idea I have. I think we should toss out the whole current retirement system for 401(k)s, 403(b)s and SEPs in favor of a system more like the one Chile has. In that South America nation, you are required — required! — to save 10% of your pay during your working lifetime and you can’t access it until you retire.

A plan like Chile has avoids the danger of people drawing from the government to pay for old age. That’s so important when you think that Social Security can’t provide for all your needs going forward. It’s just going to be there for basic subsistence.

Some 1 in 3 of us have loans from our 401(k)s. Overwhelmingly, almost three-quarters of those people who take out a 401(k) loan default on it. I don’t want you to join the 1 in 3 to begin with. Of course, sometimes someone will come to me with an occasional argument where it’s compelling enough for me to condone their borrowing from a 401(k). But most of the time, the answer is don’t do it.

Finally, for the nearly half of us who work for a business that doesn’t offer a 401(k) plan, you need to look at the Roth IRA as your own personal retirement plan.

Editor’s note: This segment originally aired in June 2011.

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