At a TPSU program held at the University of Chicago, the manager of benefits at a 5,000 employee insurance company discusses his concern about serial loan takers at his company’s 401k plan.
The benefits managers found that the same people were constantly taking out loans and that almost immediately upon paying off their loan, they took out another one. The issue came up at the TPSU breakout session and one solution offered was to require hardship criteria to be eligible to get a loan from their 401k plan. Those criteria might include medical emergency, education, buying a home or staving off foreclosure – not to take a vacation or buy a boat, for example.
Not only would hardship loans prevent many of the more frivolous ones, it might also replace hardship withdrawals that lead to permanent leakage.
Some experts discourage loans from 401k plans altogether but most companies allow them for fear that people would not participate in their DC plan without the safety valve. Along with hardship loans, best practices in managing loans discussed at many TPSU programs include allowing no more than one loan at a time and a six month waiting period between loans.
Another participant at the same TPSU program described how her company allows people that have been involuntarily terminated to continue to pay off their loan to avoid penalties and taxes, which can be severe.
Almost 20% of DC plan participants have an outstanding loan and 40% will take one over five years accounting for $6 billion in defaults annually. When leaving a job, 86% default on the loan either through neglect or because they don’t have the resources to pay them back. Managing loans properly with the help of the plans record keeper can prevent many administrative headaches as well as dramatically improve outcomes and prevent leakage especially after involuntary separation.
