Retirement Plan Loans are Getting Simpler
Retirement plan loan repayment rules seem are becoming less restrictive at many companies. Rather than forcing departing employees to pay back their retirement plan loan balances in full upon separation of service, more employers are choosing to permit employees to pay off their loans in installments.
One benefit of permitting retirement plan loan repayments by former employees over time rather than in a lump sum when they leave the job is that it prevents participants from defaulting on loans. Flexible retirement plan loan repayment arrangements thus improve retirement readiness. This occurs since loan defaults erode participants’ savings. Companies that adhere to the traditional retirement plan loan repayment arrangements require separated employees to repay their loans within a 60- to 90-day window. However, participants frequently will default on being unable to meet the retirement plan loan repayment requirements.
A large number of ex-employees will default on retirement plan loans when they leave an employer since the majority don’t have the money to pay back the loan in full within a two- to three-month period. In fact, one study found that 86% of employees who have outstanding 401(k) loans when they leave an employer default because their employers require payment in full. Retirement savings losses can be significant for participants. According to recent data from Deloitte, $2.5 trillion in potential future account balances will be lost due to retirement plan loan repayment defaults from 401(k) accounts over the next decade.
Extending the retirement plan loan repayment arrangement beyond a former employee’s termination date appears to makes a lot of sense to many employers.
Employers such as Hilton Worldwide Holdings, and United Technologies are reaping multiple benefits from extending flexible retirement plan loan repayment arrangements to former employees. These include helping employees preserve their retirement savings, plugging plan leakage, and retaining plan assets — something more plan sponsors are looking to achieve. In fact, almost 70% of plan sponsors seek to retain participants’ assets.
Offering employees flexibility when it comes to retirement plan loan repayments gives the employee the opportunity to make plan account balances whole while continuing to use the plan to build their savings for the future. Plan sponsors appear to view flexible retirement plan loan repayment arrangements as an easy feature to add to their plan. It enables more plan sponsors to act in their participants’ best interests — which becomes an obvious win for all.
