We all hear about the horror stories with regard to a 401k loan. People lose out on earnings and sometimes struggle to pay the loan back especially if they leave the company and are subject to penalties and taxes. But at a recent TPSU program held at Stonehill College, we heard from a benefits manager at a local company how a loan helped one of their employees to start contributing to the plan.
The 57 person software company offers their employees a safe harbor 401(k) and contributes 3% to all eligible employees’ accounts whether they participate or not. One employee was forced to move and did not have the money for the security deposit. She desperately turned for help to her employer who informed her that she had money in her retirement plan account to cover the deposit and could take out a loan to cover the expense. The employee did not even realize that they money was there – which is another issue with best ways to communicate with employees about benefits.
The deposit was minimal so paying back the loan in a timely fashion was not a problem but there was a big benefit overall. Seeing the value of the 401(k) plan, the employee decided to start contributing on her own.
Though most plan sponsors do not like loans, especially if they are not properly managed, leaving people without a safety valve in an emergency might inhibit some employees from enrolling in the company’s retirement plan. Leveraging the record keeper to administer the loans, allowing only one loan at a time for good reason (not to buy a boat, for example), will ease the burdens and concerns for plan sponsors.
And for some, like the Massachusetts based plan sponsor, it can help wake up employees to the benefits of a retirement plan and get them to start participating.
