PLANSPONSOR - August/September 2018 - 6

Survey Says
Efforts to
Discourage
Participant
Loans
O
ffering defined contribution
(DC) retirement plan participants
the option to take one or
more loans from their account encourages
some employees to join the plan, but
taking the loans could harm their overall
retirement savings outcomes. We asked
NewsDash readers, " How do you discourage
participant loans? "
More than six in 10 (63.6%) respondents
said their retirement plan uses education
or plan design features to discourage
participant loans, while 36.4% said their
plan does not. More than one-quarter
(27.3%) indicated their plan offers no loan
feature-one good way to discourage
participant borrowing! More than four in
10 (40.9%) reported that their plan limits
the number of loans outstanding to one;
13.6% said loans may be taken on only
certain accounts such as employee deferrals;
and 4.5% said loans can be taken only
for reasons of substantial hardship.
Although no one said participants
applying for a loan must attend an educational
session first, in " other " responses,
readers indicated that they send out information
about how taking a loan can affect
retirement savings, or there is messaging
on the plan website about the effects of
loan-taking, or, when they apply for a loan
online, a pop-up message directs them to
an education piece. Others said they have a
two-loan limit, a respondent saying one of
the loans must be for a primary residence.
As always, all verbatim responses
reflect the opinions of individual readers
and not the stance of PLANSPONSOR or
its affiliates at Strategic Insight.
" I wrote a newsletter article urging
employees to create an emergency savings
account to discourage loans from their
401(k). Taking out $5,000 and paying it
back over five years can cause a loss to the
account of over $2,600, but maybe with a
$25 [per paycheck] deposit into an emergency
savings account, the loan can be avoided. "
" Our recordkeeper has indicated that
it doesn't see evidence that participants
with loans reduce their 401(k) deferrals and
that the only possible detriment is the difference
in earnings between the interest rate
on their loan (prime plus 1% for us) versus
market returns on whatever they would be
invested in. "
" We don't discourage loans. Sometimes
a loan feature is a good thing. "
" We have an annual benefits fair and
a few articles on our intranet throughout the
year, but otherwise there is not much ongoing
participant education for the 401(k). "
" Recordkeepers love the automation,
thus they won't attach any supplemental
communication in either the online
6 PLANSPONSOR.com August-September 2018
Art by Davor Gromilović
application or with the check. "
" My current employer makes it easy
to take out loans. The CFO [chief financial
officer] and controller each have two loans,
therefore it's not likely to change. "
" I'm encouraged that the marketplace
is starting to develop strategies to address
loan defaults due to termination. "
" As a TPA [third-party administrator],
we understand the hassle and burden that
plan loans can be, so we designed the plan
without a loan option. "
" I believe that participants are more
likely to start participating if they can access
their money via loans. "
And the Editor's Choice goes to the
reader who said: " If participants had taken a
loan outside of the plan, at a higher rate, they
would have to repay the lender with aftertax
money, rather than repay themselves
[with pre-tax money]. It can be a reasonable
strategy if the participant continues making
his/her usual deferral while repaying the loan
and doesn't default on the loan if employment
ends. " -Rebecca Moore
You can participate by subscribing to
NewsDash at plansponsor.com/subscribe.

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PLANSPONSOR - August/September 2018

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