Most 401k and 403b plan sponsors offer participants the ability to take loans even though almost all of them don’t like the headaches or message it sends to employees. But a plan sponsor of a public agency attending a TPSU program at Valparaiso University explains how their no loan policy works for them.
The HR director at the 380 organization which runs the commuter rail from South Bend to Chicago explains that their supplemental savings plan does not allow participants to take loans even though they could. The key is clear messaging in their education program that the retirement plan is to viewed as a way to save for the future, not to pay current bills, which has resulted in just one request for a loan in five years.
The agency also has a DB plan and their supplemental savings plan is not voluntary – money is put away for employees whether they contribute or not – highlighting the shortcomings of defined contribution (DC) plans. As originally designed, 401k plans were meant to be a supplemental savings plan not the primary retirement vehicle. As such, loans may not appear to be so destructive. But as 401k and 403b plans have morphed into the primary retirement plan for most Americans, loans are more problematic especially for younger investors where money taken out early greatly diminishes the amount they can expect at retirement.
So even if DC plan allow loans for fear employees will not participate, there are best practices in administering loans which include:
- No more than one loan at a time
- 6 month waiting period between loans
- Hardship loans only with record keeper or TPA verifying
- Required online education
- Default insurance for those involuntarily separated which is why most loans default
What is your DC loan policy?
