PLANSPONSOR - February/March 2019 - 14

Upfront
Updating
Policies to
Discourage
Loans
TOM Foster, national spokesperson for
MassMutual's workplace solutions unit,
describes a sobering trajectory for participants
taking out plan loans: " Dipping
into retirement savings early, suspending
contributions to defined contribution
(DC) plans, or both, can reduce workers'
retirement savings on average by 14%,
delaying retirements and costing
employers more for salaries and benefits
as their workforce ages, according to
MassMutual's analysis. "
Amy Ouellette, director of retirement
services at Betterment for Business,
agrees. " When employees know they have
quick access to their 401(k) plan, often
they begin to view their retirement plan
as a revolving credit line. "
Thus, retirement plan sponsors that
make loans available might want to revise
their loan policy statements (LPSs) accordingly,
experts say. While the Department of
Labor (DOL) permits loans up to $50,000
or half of the participant's balance, whichever
is lower, sponsors might consider
altering their LPS to limit the allowed total
to $20,000 or $30,000, Foster says.
They might further want to create a
screening process that includes requiring
participants to read materials about the
adverse consequences of taking out a
loan, have them sign that document, and
add this procedure to the LPS, he says.
" That might be a way to get participants
to rethink taking out a loan. "
The LPS could also limit loans to one
at a time, plus create windows of time
between each loan, to act as barriers, says
Andy Heiges, group manager for advice,
retirement income and financial wellness
at T. Rowe Price Retirement Plan
Services. Many retirement plans do not
permit participants to contribute to their
401(k) when they are paying back a loan,
which Heiges thinks they should.
Sponsors should also consider
amending their LPS to let participants
continue paying back any loans after separation
from the company, says Chad Parks,
founder and CEO of Ubiquity Retirement
+ Savings. However, " The plan sponsor
and the recordkeeper have to agree on this
policy, and the sponsor may not want to be
burdened with ensuring that the participant
continues to send in [his] payments
proactively, as the money will no longer
be automatically withdrawn from [his]
paychecks, " he points out.
Imposing a loan origination and
maintenance fee could additionally serve
as a deterrent, says Snezana Zlatar, senior
vice president and head of full-service
product and business management at
Prudential Retirement.
Similarly, the sponsor could raise the
interest amount that participants need to
pay, says Marina Edwards, senior director,
retirement, at Willis Towers Watson. The
typical interest rate sponsors impose on
14 PLANSPONSOR.com February - March 2019 Art by Jackie Ferrentino
plan loans is 1 percentage point above the
prime rate, she notes. Sponsors may want
to amend their plan documents to make
that 2 percentage points. " The interest rate
must be reasonable, and the IRS has informally
stated that prime plus 2% would
be reasonable, " she says. Not only might
this deter borrowing, but, because the
interest gets paid into the owner's account,
it increases contributions-something
sponsors like, she adds.
Addressing the need to borrow helps
too, e.g., giving financial education, particularly
about budgeting. " Offering a financial
wellness program that goes beyond
the 401(k) plan, a program that teaches
budgeting is important, " Ouellette says.
Also effective is to encourage creation
of emergency savings funds, says Josh
Sailar, investment adviser with Miracle
Mile Advisors.
Zlatar concurs, noting that, according
to Prudential research, 63% of Americans
could not afford even just a $500 emergency,
and 31% would consider taking a
retirement plan loan or withdrawal to cover
such expenses. For that reason, Last July,
Prudential created a post-tax emergency
savings fund feature within its retirement
plan platform. -Lee Barney
http://www.plansponsordigital.com/plansponsor/february-march_2019/TrackLink.action?pageName=14&exitLink=http%3A%2F%2FPLANSPONSOR.com
PLANSPONSOR - February/March 2019

Table of Contents for the Digital Edition of PLANSPONSOR - February/March 2019
