At a TPSU program held at Marylhurst University, the HR director at a 140 person organization suggested that plan participants requesting a loan from their 401k and 403b account should be required to go through an education process.
Many plan sponsors complain that loans are out of control with many employees becoming serial loan takers. ICI (Investment Company Institute) data shows that loan activity is dwindling yet still hovers near 18% of all participants. Education about the damage of loans may be helping but perhaps we need to go further like is required with student loans.
To get a subsidized student loan, applicants must go through a series on online counseling with even greater review for those with adverse credit history. The counseling available at StudentLoans.gov includes:
- Entrance Counseling
- Financial Awareness Counseling
- Plus Counseling (those with adverse credit history)
- Exit Counseling
The idea of requiring similar counseling to employees in a DC plan that want to take out a loan resonated at a TPSU program held at Villanova which the HR Director is going to try to implement at her company hoping that even if the training does not discourage most of her employees, it will better inform them about how to best handle the loan and avoid penalties.
Most plan sponsors cannot eliminate DC plan loans as it might inhibit participation but there are best practices including:
- One loan at a time
- Six month waiting period between loans
- Loans based only on hardship which are verified and administered by the plan’s record keeper
- Default insurancefor those involuntarily separated which is why most loans default
The HR manager attending TPSU at Marylhurst suggested that plan sponsors build education into the loan process either on their own or with the help of their providers. Managing DC loans can be difficult but with proper process, guidelines and education, the results can be prolific.
