	Introduction

The major trend in retirement plans for American workers over the past 25 years has been a shift from defined benefit (DB) to defined contribution (DC) pension plans. In DB plans, employees are guaranteed individual monthly retirement incomes based on a formula that uses their salaries and lengths of service. In DC plans, however, employees are provided with individual accounts that accumulate employees' (and often employers') contributions and investment returns. Employees use the funds in their accounts as a source of income in retirement. A feature of many DC plans is the ability to access the funds prior to retirement. This CRS report provides background on borrowing from DC plans; examines the incidence of loans from DC plans; analyzes the characteristics of households that had outstanding loans against their DC plans in 2001, 2004, and 2007; and discusses the public policy implications. Most conventional advice warns against making withdrawals or borrowing from a DC plan. Data on Borrowing

This section of the report examines survey data on households that were able to borrow against their DC plans and compares the characteristics of households that had outstanding DC plan loans with those households that did not have any outstanding loans. Most households (85.0%) had access to their DC accounts either by making a withdrawal or by borrowing. For comparison, 14.6% of households that could borrow in 2007 had outstanding loans (see Table 1 ). The results are consistent with households having borrowed from their DC plans because of financial difficulty. Households with poor credit may not have been able to find other sources of credit and may have had to borrow from their DC plan because of financial difficulty. This indicates that more indebted households are more likely to have outstanding DC plan loans. Although households in which the head is non-white have a greater percentage of loans outstanding compared with households in which the head is white, differences in race do not appear to be a statistically significant factor explaining the characteristics of households with outstanding DC plan loans. Possible explanations include (1) households with IRAs may prefer to make withdrawals from their IRAs rather than borrowing from a DC plan; (2) households with IRAs may be more disciplined savers and therefore may be less inclined to endanger their long-term savings goals; or (3) households with IRAs are wealthier and have more sources of credit available to them. Congress, in providing tax-advantaged retirement accounts, is encouraging households to save for retirement in order to supplement other sources of retirement income such as Social Security, employer provided DB plans, and private savings.
Americans are being given more responsibility for saving for their own retirements. Over the past 25 years, fewer households have been covered by traditional defined benefit (DB) retirement plans, in which retirees receive monthly checks based on a formula using some combination of earnings history and employment tenure. In place of DB plans, more and more employees are being covered by defined contribution (DC) plans, in which employees (and often their employers) place funds in individual employee accounts that are used as the basis for retirement incomes.
A feature of many DC plans is the ability to access the funds prior to retirement, either by making withdrawals or through borrowing from the account. If participants have the choice, borrowing is usually the better option. In fact, borrowing from a DC account is frequently less costly than other sources of credit, such as credit cards or installment credit. Although borrowing from DC plans has certain advantages, significant disadvantages exist. Most personal finance advice warns against borrowing from retirement plans as it may endanger individuals' long-term retirement income security.
This report examines the issue of accessing funds from DC plans, with a specific focus on borrowing from DC plans. The topics include a discussion of the relevant laws and regulations of making withdrawals and borrowing from retirement plans; a discussion of the advantages and disadvantages of borrowing from DC plans; a comparison of the characteristics of households that have outstanding loans with households that do not have outstanding DC plan loans; and a discussion of some relevant policy issues.
The data used in this report indicate that in 2001, 2004, and 2007, about 15.0% of households that could borrow had outstanding loans. Among those households that had outstanding loans, it appears that most households borrowed because of poor financial conditions or because of a lack of other sources of credit. Households that appear to make better informed financial decisions (such as greater shopping for credit and having an Individual Retirement Account, or IRA) are less likely to have outstanding DC plan loans.