Maria is a reliable, ten-year employee. Last spring, she quietly borrowed $18,000 from her 401(k) to cover a medical bill and back rent. She didn’t ask for help, she just did what felt like the only option.

She’s not alone. If you’re seeing more employees borrow against their retirement savings, don’t dismiss it as a routine plan feature being used as intended. It’s one of the clearest signals that your workforce is under serious financial stress, and that stress has real consequences for your organization.

What Is a 401(k) or 403(b) Loan and Why Are Employees Using Them?

A 401(k) or 403(b) loan lets employees borrow up to 50% of their vested account balance (max $50,000) with no credit check, no impact on their credit score, and low interest that goes back into their own account. On paper, it can sound almost sensible.

In practice, employees are turning to this option because they’re out of others. Despite low unemployment, persistent inflation has stretched budgets to a breaking point. Workers are using their retirement accounts as a lifeline to prevent eviction, cover medical bills, or simply keep up with the rising cost of everyday life.

How Much Are Employees Typically Borrowing?

The average outstanding 401(k) loan balance is approximately $10,700, according to Vanguard’s How America Saves data. And that number is rising: a 2025 benchmarking report found that average loan sizes grew by 4% in 2024, slightly outpacing inflation,  with increases seen across every age group. Employees aren’t just borrowing more often; they’re borrowing more money each time.

How Many Employees Are Taking Out 401(k) or 403(b) Loans?

More than you might think, and the number is growing. According to Fidelity’s most recent retirement data, 19.4% of plan participants had an outstanding 401(k) loan in 2025, up from 18.9% in 2024. Vanguard’s data shows 13% of participants carried an outstanding loan at year-end 2024. Across both recordkeepers, the trend line is moving in the wrong direction.

What Are Employees Using 401(k) and 403(b) Loans For?

Debt repayment is the number one reason employees tap their retirement savings, according to Principal’s Retirement Security Survey. But the full picture is broader:

• Paying off credit card debt (cited by 25% of borrowers)
• Covering medical bills and unexpected healthcare costs
• Avoiding eviction or foreclosure, making rent or mortgage payments during a financial shortfall
• Purchasing a home (cited by 15% of borrowers)
• General living expenses that paychecks no longer stretch to cover

Most of these reasons reflect basic financial survival, not discretionary spending. When employees are borrowing from their future to pay for today’s necessities, it’s a sign the financial safety net has already broken down.

Which Industries See the Highest 401(k) and 403(b) Loan Activity?

Higher loan rates are most often found in industries where wages are lower, income is less predictable, and employees have fewer financial buffers. Hospitality, retail, healthcare support roles, and manufacturing are consistently among the sectors where workers face the greatest financial stress.

Hospitality workers are among the least confident about retiring comfortably, only 44% say they expect a comfortable retirement, compared to 78% of tech workers. Retail employees face similarly thin margins between income and expenses. And while healthcare workers often have access to solid 403(b) plans through large employers like hospitals and health systems, wage pressure and irregular scheduling keep financial stress high.

That said, loan activity isn’t limited to lower-wage sectors. Manufacturing employees, who often have strong plan access, still carry meaningful loan balances, a reminder that access to a retirement plan alone doesn’t protect workers when broader financial pressures are high.

What Is Considered a High 401(k) or 403(b) Loan Rate for Your Organization?

There’s no single universal threshold, and benchmarks vary by plan size and industry. As a general reference, national data puts roughly 13–20% of participants with an outstanding loan as the current norm across large recordkeepers. If your plan is approaching or exceeding that range, it’s worth a closer look.

Rather than fixating on a single number, HR leaders should watch for these patterns:

• Loan issuance increasing year-over-year, even modestly
• Loans concentrated among a specific employee group, department, or location
• Rising default rates among employees who separate from the company
• Multiple loans per participant, which signals ongoing financial instability rather than a one-time need

These patterns are more telling than any single percentage. Your plan administrator or recordkeeper can pull this data, and if you haven’t asked for it recently, now is a good time to start.

What Your Employees May Not Fully Understand

Most employees who take a 401(k) loan are focused on solving an immediate crisis, they might not be thinking through the long-term consequences. Here’s what they’re often missing:

• Lost growth: When money is borrowed from the account, it’s no longer invested and growing. The compounding returns that are the engine of long-term retirement security simply stop on that portion of their savings.
• Double taxation: Loan repayments are made with after-tax dollars, meaning employees are effectively taxed twice on that money,  once now, and again when they withdraw it in retirement.
• Job separation risk: If an employee leaves the company, voluntarily or not, the outstanding loan balance may become due immediately. Failure to repay means it’s treated as a taxable distribution, plus a 10% early withdrawal penalty for those under 59½.
• The default trap: If the loan can’t be repaid for any reason, it’s treated as a distribution. The employee owes income taxes plus that 10% penalty, often at the worst possible financial moment.

The appeal of easy access is exactly what makes this so risky. Employees make a short-term decision without fully understanding how much it could cost them decades from now.

What This Means for Your Organization

One loan is a personal financial decision. A pattern of loans across your workforce is an organizational sign that employees may be going through a variety of hard financial decisions, emergency circumstances, loss of income, lack of a plan, or maybe they do not know the long term consequences of taking out a 401(k) loan. 

Rather than asking “is this a problem?”, start asking questions like: How often is this happening? Is it increasing year-over-year? Is it concentrated in a specific employee group or location? Are employees defaulting when they leave? The answers will tell you a lot about the financial health of your workforce.

What You Can Do

• Provide access to  financial wellness resources. Unbiased, accredited financial coaches (look for AFC® and CFP® certifications) can give employees a trusted place to work through financial challenges before they reach a crisis point.
• Educate before the decision is made. Proactive education, in plain language, helps employees understand the real cost of a 401(k) or 403(b) loan and consider alternatives first.
• Review your plan documents. Make sure loan and withdrawal rules are clearly outlined and consistently enforced by your plan administrator.
• Use exit conversations wisely. When employees leave, explain the consequences of outstanding loans and help them understand their repayment options. It protects them, and reduces your plan’s default risk.

At Your Money Line, our goal is to help every employee build real financial stability and confidence.. We bring 1:1 coaching to employees across the nation in a way that’s scalable, sustainable, and actually something employees look forward to.

When a participant comes to one of our coaches with a 401(k) or 403(b) loan, or is considering taking one out, here’s how we approach it:

1. Create visibility into cash flow

We start by helping participants clearly see where their money is going through a spending inspection. Once that visibility is there, it’s much easier to identify opportunities to create margin and reduce the need to borrow, and it makes building a budget far less intimidating.

2. Strengthen the emergency fund

A large percentage of 401(k) and 403(b) loans are driven by unexpected expenses. We work with participants to build the right-size emergency fund so they have a real buffer between whatever they're facing and their retirement account.

3. Address debt that’s putting pressure on the monthly plan

When debt payments take up too much of someone’s cash flow, a 401(k) loan can start to feel like relief. We help participants organize their debts and put a plan in place to reduce that pressure over time. 

4. Provide real-time decision support

When someone is considering a loan, we try to help them slow down the decision and walk through the trade-offs in plain language, including the long-term impact and alternative options. In many cases, that can lead to a better, more informed path forward.

That’s why we love our coaches. They provide real-time, personalized advice that is unique to each participant. It’s one to read about what you should do online, but it's a different experience when you can talk it through with a real 1:1 financial coach who genuinely wants to see you succeed. 

If you’re seeing 401(k) or 403(b) loan activity in your plan and want to talk through what it might mean for your workforce, we’d love to hear from you. Schedule a call with the Your Money Line team today, let's talk about financial wellness for your team.