COLUMBUS, Ohio—The funds that Nationwide Mutual Insurance Co. employees invest in their 401(k) plan are a bit more "liquid" than is typical, thanks to adoption of what Jack Towarnicky, associate vp of benefits planning, calls "21st century loan technology."

Among other things, employees can roll over funds into the plan at hire, including monies from individual retirement accounts and lump sum benefits earned from a previous employer's pension or 401(k) plans, and immediately qualify for a loan.

Nationwide employees also can take out 15-year mortgages from their 401(k) savings. Just as with most other home mortgages, employees can take a deduction on their federal income taxes for the interest paid on these loans. As of year-end 2007, 148 Nationwide employees had taken out mortgage loans from their 401(k) plan.

While most employers require employees to pay in full any outstanding 401(k) loans when they terminate employment, former Nationwide employees can continue to make payments even after they leave the company.

Both employees and former employees also can have up to two loans at any time, subject to the Internal Revenue Code limits of $50,000 or 50% of the vested account balance, whichever is less.

These loan features are a radical departure from what Nationwide originally offered 401(k) plan participants, Mr. Towarnicky said.

When Nationwide's circa 1968 employee retirement savings plan was amended in 1984 to include 401(k) features, there was no loan option even though it permitted hardship withdrawals, he said. It also provided for only lump sum distributions, allowed transfers only once per month and permitted changes in contribution rates just once per quarter.

Now, transfers can be made and contribution rates can be changed each pay period and amounts taken out can be structured to avoid the entire sum being considered a distribution.

To make the plan more flexible, "we changed the goal of the plan," Mr. Towarnicky said. "We tried to change it into a lifetime financial instrument."

Mr. Towarnicky said he believes that if employers make 401(k) funds more accessible via loans and make repayment easier, employees will save more for retirement than they might otherwise. Today, Nationwide's average contribution rate is 7.01% of payroll.

So far the changes at Nationwide have significantly reduced the "leakage" that often occurs in employer-sponsored 401(k) plans, especially during tough economic times like the nation is currently experiencing, Mr. Towarnicky said.

It also has limited the loss of funds that normally would occur due to attrition. In fact, nearly 40% of the money in the plan and 40% of its participants "don't work here anymore," Mr. Towarnicky said. "It's a little over $1 billion of assets that people could move tomorrow if they wanted to."

At the end of 2007, 709 terminated employees had 401(k) loans, 499 of whom continue to make loan payments on a quarterly basis, Mr. Towarnicky said.

Those not repaying the loans are in default, which transforms the accounts into lump-sum distributions that are subject to taxes and penalties.

Another 20% to 25% of participants are eligible to take distributions because they are older than 59‡ or are disabled, but they don't, he added.

"Everything that we've done is to encourage reasonable access, but more importantly, to facilitate repayment," Mr. Towarnicky said. "There's a lot of economic anxiety out there. One of the first things that sometimes go when people are financially strapped is their contributions to savings."

"We want to encourage people to save more than they think they can afford to earmark for retirement," Mr. Towarnicky said.

If employees only save the sum they think they can afford to set aside until retirement, it is likely they'll be more conservative than they should be, he said.

"We would rather encourage you to save with all kinds of short-, intermediate- and long-term goals in mind," Mr. Towarnicky said.

To facilitate this, "we want to make it accessible to borrow the money, but make it real easy to repay the loan. Borrow, repay, rebuild the account for a future need, over and over and over again, and ultimately there's a significant balance available for retirement," he said.

"People are their own economists. Every day they're making financial decisions. With respect to this money, people had to give something up in order to put that money aside, and I find they're quite circumspect, quite careful about what they do with that lifetime of savings," Mr. Towarnicky said.