PLANSPONSOR - June/July 2018 - 13

Fiduciary Responsibilities as to DC Loans
" BECAUSE the Department
of Labor
[DOL] views plan loans as investments,
they should be treated with the same
level of care and scrutiny as any other
investment, " says Rob Reiskytl, a partner
in Aon's retirement consulting division.
" Plan sponsors need to consider the
structure of the loans, the cost of the loans,
and under what circumstances they should
allow these loans to be available. "
James Olson, managing director at
FPS Group, agrees that plan loans " fall
into plan sponsors' fiduciary oversight.
They need to establish a loan policy that
considers how many a participant can
take and work with their recordkeeper on
how to construct them. Loan policies are
overlooked too frequently. "
The 2017 PLANSPONSOR Defined
Contribution (DC) Survey found that 79.3%
of defined contribution plans offer plan
loans. Reiskytl says that does not surprise
him, as " plan loans serve an important
purpose in that they permit participants
to access their money, " encouraging them
to participate in the plan. Without a loan
provision, he says, fewer participants
would be willing to sign up for the plan.
DC plan sponsors that offer loans
should pair them with financial wellness
education that includes information on
budgeting and creating an emergency
savings fund, says Snezana Zlatar, senior
vice president at Prudential Retirement.
That education should include information
about the effects of a loan default,
notes Dominic DeMatties, a partner with
Alston & Bird. Also, he points out, a terminated
participant used to have just 60 days
from termination to repay any loans. The
Tax Cuts and Jobs Act has extended that
until the person's tax return due date. " It's
important for people involved in administering
the plans to educate participants
about this, " DeMatties says.
Participants need to be warned that,
should they take out a loan, they might be
likely to eliminate or reduce their deferrals
to their plan, says Tom Foster, national
spokesman for workplace solutions at
MassMutual. " Think of what that does
to an employee's retirement outlook. It
also eliminates the company matches,
increases his taxable income and reduces
the value of compounding. If you default
on the loan or are laid off, then the entire
balance becomes taxable, and if you're
younger than 59 1/2, you pay an additional
10% fine.
" The many downsides to a loan have
a snowball effect, " he stresses. " Before
allowing a participant to take out a loan,
sponsors should give him a tutorial on the
pros and cons and require him to sign an
agreement " stating that these facts were
shared with him before he took the loan.
Participants should also know they
TALKING POINTS
Expense Ratios Edge Downward
The average expense ratio that 401(k) plan
participants incurred for investing in equity
mutual funds fell from 0.48% in 2016 to 0.45% in
2017; for investing in hybrid mutual funds, it fell
from 0.53% to 0.51%, and, for investing in bond
mutual funds, it fell from 0.35% to 0.33%.
Source: ICI, " The Economics of Providing 401(k) Plans: Services, Fees and Expenses, 2017 "
Divorce Compounds Risk
Fifty-three percent of households that have
gone through a divorce are at financial risk in
retirement, compared with 48% of households
that have not experienced a divorce.
Source: Center for Retirement Research at Boston College
PLANSPONSOR.com June-July 2018 13
have five years to repay a loan-25 years if it
is used to pay for a primary residence, says
Len Hayduchok, president of Dedicated
Financial Services. But should a participant
leave his job or should the company go out
of business, the loan will be considered a
distribution and need to be repaid in full,
along with the taxes. In those scenarios,
the loan becomes " a cascading financial
problem, " Hayduchok says.
One way plan sponsors can mitigate
against loan defaults, says Reiskytl, is to
permit terminated participants to keep
making payments through Automated
Clearing House (ACH). Another option
is to make loan insurance available to
participants, he adds. This is a " relatively
new offering. It isn't very common, but
[insurance products] are out there and are
growing. " -Lee Barney

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PLANSPONSOR - June/July 2018

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