If that's not a good enough reason, then how about the risk of losing your job and having to pay back the loan in a short time? That's a real possibility for many workers in this economy.
Li and Smith suggest two changes that would reduce the risk of 401(k) borrowing. The first would make 401(k) loans "portable." Loan servicing could roll over to a new employer after a job change, along with the account balance, the economists argue.
"This would allow participants to continue to repay outstanding balances over time via payroll deduction," Li and Smith write.
Second, employers could be required to continue servicing the loans of their unemployed workers. This would allow laid-off workers to keep making monthly 401(k) loan payments rather than coughing up a lot of cash within the 90-day window.
Li and Smith acknowledge these changes would impose some new requirements on employers. And I'm sure employers would complain about the added work. But it would make borrowing from a 401(k) less of a burden for people going through a period of unemployment or for others changing jobs.
"Households are often better off financing consumption out of their own assets instead of by borrowing from outside lenders," Li and Smith conclude. "Allowing participants some pre-retirement access to their savings can increase 401(k) participation and contributions, particularly among younger and more liquidity constrained households. Given that 401(k) loan programs exist, it seems appropriate to design them in a way that minimizes financial risks to participants and maximizes 401(k) participation and contributions."
No matter what's happening in the economy, it ought to be difficult for people to take out loans against their retirement savings. Make it too easy and people will pull money out too often and for frivolous purchases. But the reality is that people experience financial setbacks. If we want to continue pushing people to save for their own retirement, especially following the near-catastrophic losses on the stock market, we have to ease up on forcing borrowers to come up with a lump sum of money at the worst possible time.
If the choice comes down to borrowing on a credit card to buy food or make rent or mortgage payments, or taking it from a retirement account, I'd go for the 401(k) loan.