Do you have a 401(k) loan program? What trends have you seen? Share your thoughts in the comments. —Andrea Davis, Managing Editor
A significant component of retirement readiness is protecting participants from themselves. Many recent studies have shown that major obstacles to employee attainment of retirement readiness include the loss of account balances due to loan defaults and hardship withdrawals. This account leakage can be reduced by a well-managed participant loan program. A state-of-the-art loan program has the following characteristics:
Loans are limited to safe harbor hardship withdrawal criteria
Plan loans are
Participants are allowed to take only one loan at a time
Participants who take more than one loan have been found to default more often on their loans. Defaults can occur when a participant moves on to another job or loses a job and is unable to continue making loan payments. Some participants also take as many loans as possible if it appears that they may be facing a layoff or moving on to a different employer, as a way of advancing a distribution from the plan.
Referral to the company EAP is mandatory for all loan applicants
If safe harbor hardship withdrawal criteria are used to determine loan eligibility, it only makes sense to refer potential borrowers to the employee assistance program for financial counseling. Keep in mind that the retirement plan may be the lender of last resort for these employees, many of whom aren't able to qualify for a loan from a financial institution. Requiring financial counseling before the loan is made may help the employee avoid a hardship withdrawal, where the funds permanently leave the retirement plan.
Tighter participant loan programs are becoming commonplace at companies committed to retirement readiness. Plan sponsors who have successfully migrated to more stringent
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC, a Registered Investment Advisory firm helping retirement plan sponsors with their investment, fiduciary, employee education and compliance responsibilities. He can be reached at bob@lawtonrpc.com or 414.828.4015.