Practice Management

Robbing Peter to Pay Paul

By Tom Foster

The expression, “Robbing Peter to Pay Paul,” dates back to 16th Century England. It refers to money shifted by the Church of England from St. Peter’s Cathedral to pay for repairs to St. Paul’s Cathedral.

Today, the phrase commonly refers to the trading of one debt or financial obligation for another, essentially a zero-sum game. It’s much like what happens when retirement plan savers withdraw or borrow money from their 401(k) plan.

The Pension Research Council (PRC) at the Wharton School, University of Pennsylvania reports that one in 10 401(k) plan loans wind up in default, draining $6 billion a year from defined contribution plans1. Typically, the unpaid loans are by employees who have tight financial circumstances and lack liquidity options to address financial emergencies.

Many Middle Americans – those with annual household incomes of between $35,000 and $150,000 – struggle to deal with financial emergencies, according to the MassMutual Middle America Financial Security Study2(Middle America Study). Often, the choices they make are harmful from a long-term financial perspective.

When faced with a $500 emergency, for instance, 58 percent would use a high-interest rate credit card, the Middle America study shows. While 38 percent would ask family or friends for a loan or gift, 14 percent say they would withdraw or borrow money from their 401(k). One in four (24 percent) of those with less than $45,000 in household income would tap their 401(k).

The statistics grow bleaker still with a $5,000 emergency.  While 38 percent would hit up family or friends and 37 percent would use a credit card, one in four (25 percent) would reach for their 401(k). The worst offenders were those with household incomes of between $75,000 and $150,000.

It’s a concern not only for participants who took money from their retirement plan but for their employers as well. There are some strategies for employers to tighten the 401(k) spigot as well as provide alternative sources of cash to help employees better manage emergencies as they crop up.

Employers have different views when it comes to making retirement plan savings available to employees in the form of hardship loans, withdrawals or both. While not all plan sponsors allow such activities, many do and often have liberal rules, allowing multiple loans and relatively high dollar limits.

Financial advisors can suggest that sponsors limit loans and withdrawals. For instance, if loans are allowed, restrict participants to a single outstanding loan at any given time. Dollar amounts for both loans and withdrawals can be capped as well.

But what happens when Peter or another employee is faced with a financial emergency and has few other choices than to tap his or her retirement savings? It’s a legitimate concern.

Some employers are making available low-cost loans, the terms of which are governed by an employee’s salary and ability to repay. The loans can be secured relatively quickly and often have relatively low interest rates when compared to credit cards. It may be a new source of funds for Paul and others.

Companies are also providing more education to workers on topics such as budgeting, financial planning and debt management. It’s a longer-term solution to the savings issue that can help change bad financial habits over time.

The ultimate goal is to discourage employees from siphoning money from already-modest retirement savings.  By helping employees better cope with shorter-term financial challenges, they will be better able to contribute to and preserve their existing retirement savings.

It’s a blessing for Saints Peter’s and Paul’s retirement as well as the retirements for many other workers.


E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts Mutual Life Insurance Co. (MassMutual).


1Borrowing from the Future:401(k) Plan Loans and Loan Defaults, Pension Research Council, Wharton School, University of Pennsylvania.

22017 MassMutual Middle America Financial Security Study.