Many experts warn against even offering loans in defined contribution plans but not Angela Lenzey, an HR professional at a mid-size manufacturer in the Houston area who attended a TPSU program at Rice University. She credits the loan option as a big factor in the company’s +90% participation rate.
Angela notes that because of the loan option, employees feel “all is not lost” in case they need the money in an emergency. At the same time, Angela cautions her employees to not use their DC plan account as a piggy bank. Another HR professional attending the same TPSU Rice program bemoaned that 3,000 of her 9,000 had a loan which is a nightmare to administer. The Investment Committee Institute recently released a report noting that the use of loans remain high in 2015.
Though many companies struggle with whether to offer loans in their 401(k) or 403(b) plans fearing that plan participants will use their retirement savings account as a piggy bank, many workers will not participate unless there is a way to get to their money in an emergency. If there’s a health issue which can literally mean life or death or is someone is in danger of losing their house, a loan might make sense. But remember that best practices when it comes to loans include only allowing one loan at a time and providing guidelines about the circumstances under which they can be used.
And there are some innovative solutions for dealing with loans. For example, when an employee with an outstanding loan is separated from service, the result can be dire if they cannot afford to pay it back within the allotted time. Not only are there penalties for early withdrawal, taxes will be imposed. A new firm, Custodia Financial, offers low cost insurance which pays off the loan for those that are involuntarily separated.
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