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TIAA-CREF Loans


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TRying to fill out a Crobel 403b "prototype" and strugglng with the interest rate section. Does everyone agree that the Plan Administrator is NOT setting the loan interest rate? Technically, TIAA is loaning the participant the money. I'm just curious what people's thoughts are on this matter...

Austin Powers, CPA, QPA, ERPA

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Without seeing the words on the page, if this is an ERISA Plan, the fiduciary appears to be doing one of two things, (i) determining that the rate set by TIAA-CREF is a correct rate (and how does the fiduciary justify that without knowing more about how the rate is set?), or (ii) engaging TIAA-CREF to set the rate. Since (ii) would be engaging TIAA-CREF to be a fiduciary and TIAA-CREF would not accept that engagement, I wold not rely that explanation. This is one of those rough spots in the 403(b) environment where the unexamined and undisciplined past practices provide discomfort in the new light. Loan interest rates in any environment are troublesome, since most of the the arrangments are unconscious. Your problem is that you understand and you care, which makes you especially unsuited for 403(b) plan work.

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Your problem is that you understand and you care, which makes you especially unsuited for 403(b) plan work.

That's great...

Out of curiosity, are you aware that the TIAA loans are structured such that TIAA is lending the money - not the Plan? The participant is simply required to put money in the TIAA traditional account as collateral.

Austin Powers, CPA, QPA, ERPA

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From your keyboard to the DOL's ears. How this is not a PT I will never know, but what I do know is that this is how they all work (other insuracne companies do it too). And what's more, the auditors all signed off on this as not being a PT. Soimeone explained it to me one day.

Austin Powers, CPA, QPA, ERPA

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And this is allowed under the anti-assignment provisions of ERISA because ... ? I never try to explain, and I try to avoid having to to comprehend, how TIAA-CREF works.

What is the anti assignment problem you are alluding to?

The TIAA product is either a group or indvidual annuity contract which has a loan provision. An ERISA pension plan can be funded with an annuity instead of a trust where the annuity contract holds plan assets. See ERISA 403(b)(1). The loans are only available through TIAA which is a fixed annuity contract which pays an adjustible interest rate that cannot be less than 3%. The loan rate is determined by TIAA and the participant continues to earn the contract interest rate and dividends on the borrowed amount. If the contract interest rate is 3.5% and the loan interest rate is 5.5% the net cost to the partiicipant is 2.0%.

I am not sure why everyone is getting excited about this. Loans on TIAA contracts have been around for over 20 years.

It might help if you actually read ERISA.

mjb

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From your keyboard to the DOL's ears. How this is not a PT I will never know, but what I do know is that this is how they all work (other insuracne companies do it too). And what's more, the auditors all signed off on this as not being a PT. Soimeone explained it to me one day.

What is the basis for a PT?

See ERISA 403(b)(2).

mjb

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Ouch.

First let me state that I know it is not a PT, I just don't know why. TIAA is a party-in-interest as the custodian and as a service provider, so the loan is a transaction with a party-in-interest. I assume there is an exemption somewhere? But I was never comfortable with the fact that while in general participants (or at least the plan as a whole) would reap the benefits of the participant's interest, in this case it is TIAA that profits. You mention the cost to the participant is 2% - another way of putting it is that the income to TIAA is 2%.

And then if the participant defaults, TIAA would garnish that portion of the participants interest in the Traditional account, which would be the seeming violation of the anti-assignment rule.

So don't make it sound like this is "plain vanilla" where there is clearly something more complicated going on.

Austin Powers, CPA, QPA, ERPA

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Ouch.

First let me state that I know it is not a PT, I just don't know why. TIAA is a party-in-interest as the custodian and as a service provider, so the loan is a transaction with a party-in-interest. I assume there is an exemption somewhere? But I was never comfortable with the fact that while in general participants (or at least the plan as a whole) would reap the benefits of the participant's interest, in this case it is TIAA that profits. You mention the cost to the participant is 2% - another way of putting it is that the income to TIAA is 2%.

And then if the participant defaults, TIAA would garnish that portion of the participants interest in the Traditional account, which would be the seeming violation of the anti-assignment rule.

So don't make it sound like this is "plain vanilla" where there is clearly something more complicated going on.

Why is a loan from a TIAA annuity contract any different than a loan from a trusteed plan? Both are permissible loans

under ERISA 408(b)(2).

I dont understand your garnishment theory. ERISA 401(b)(2) states that in the case of a guaranteed benefit policy issued by an insurer plan assets do not include the assets of an insurance company. Any action taken by the insurance company under the annuity contract to recover the defaulted amount involves assets of the insurer's general account.

mjb

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"Why is a loan from a TIAA annuity contract any different than a loan from a trusteed plan? "

Ironically, the rest of your post goes on to describe precisely how it is different. But I do appreciate your explanation, which finally has shed some light on this for me!

Austin Powers, CPA, QPA, ERPA

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"It might help if you actually read ERISA."

I was reading the posted comment that said the loan was from TIAA-CREF (not the annuity contract) and was secured by the participant's interest. In my first post, I started with the statement that I was not looking at the source documents. I do not start with the presumption that someone is mistaken, but I may question a curiousity. So I was reading what there was to read, including the portion of ERISA relevant to the precise point of a discussion in progress.

Your observations about what probably was really the nature of the arrangement were helpful. Your failure to read closely the dialog without a presumption that everyone else is an idiot produced your misplaced criticism, which did nothing to enhance your useful comments.

So now that we have the attention of somebody who knows something, and we go back to the original question after some unnecessarily painful education and discipline, does the plan fiduciary have any responsibility with respect to compliance with the loan rules, specifically the interest rate?

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"It might help if you actually read ERISA."

I was reading the posted comment that said the loan was from TIAA-CREF (not the annuity contract) and was secured by the participant's interest. In my first post, I started with the statement that I was not looking at the source documents. I do not start with the presumption that someone is mistaken, but I may question a curiousity. So I was reading what there was to read, including the portion of ERISA relevant to the precise point of a discussion in progress.

Your observations about what probably was really the nature of the arrangement were helpful. Your failure to read closely the dialog without a presumption that everyone else is an idiot produced your misplaced criticism, which did nothing to enhance your useful comments.

So now that we have the attention of somebody who knows something, and we go back to the original question after some unnecessarily painful education and discipline, does the plan fiduciary have any responsibility with respect to compliance with the loan rules, specifically the interest rate?

it was never on my radar scope that anyone would construe the original post to mean that TIAA would be making loans to plan participants outside of the annuity contracts used to fund the benefits. I can see that your problem was with the phrasing of the original post to imply some kind of loan outside of the annuity contract.

As for the fiduciary issue, TIAA sets the interest rate under the provisions of the TIAA annuity contract which currently is 5% and floats with the Moody's corporate rate. TIAA credits 3% on the amount borrowed. As I understand it the loan is between the participant and TIAA, not the plan, and the loan continues after termination of employment. The interesting question is what is the fiduciary responsibility where the loan is made by TIAA with non plan assets. A reasonable rate of interest is is considered an interest rate charged by banks in the business of lending money. Is 5% a reasonable interest rate especially when the net interest rate after deducting the interest earned on the annuity is 2%?

mjb

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  • 2 years later...

I would love to resurrect this topic because it recently arose in connection with my employer's 403(b) plan and I am struggling. Can someone explain how this is not a prohibited transaction and that using the participant's annuity balance as collateral for loan made outside the Plan between TIAA and the participant does not violate the anti-assignment rules? I realize that this is widely done, and TIAA is surprised that I am raising the issue, but I can't get my head around it.

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  • 2 weeks later...

I would love to resurrect this topic because it recently arose in connection with my employer's 403(b) plan and I am struggling. Can someone explain how this is not a prohibited transaction and that using the participant's annuity balance as collateral for loan made outside the Plan between TIAA and the participant does not violate the anti-assignment rules? I realize that this is widely done, and TIAA is surprised that I am raising the issue, but I can't get my head around it.

I am not following your reasoning. The TIAA contract is the plan because the plan's assets are held in the annuity contract in lieu of a trust. Therefore tha plan assets are being used for the loan. The annuity assets are also considered to be eligible for plan loans under reg. 1.401(a)-13(d)(2) because the participant's loan is secured (by whatever means) through the annuity contract which holds the participant's accrued benefits (instead of a trust.) If the promissory note secures the loan against the participant's interest in the annuity contract then the loan is secured under the anti-alienation reg and is not a violation of the PT rules.

mjb

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See Austin's post above. "....are you aware that the TIAA loans are structured such that TIAA is lending the money - not the Plan? The participant is simply required to put money in the TIAA traditional account as collateral." My understanding based on my own research agrees with Austin's. The funds for the loan are coming from TIAA's general assets and the contract is collateral. So does that mean that tehnically is is not a "plan" loan? If it is not a plan loan does that mean there is a problem that the plan assets are used as collateral? Is it a PT? I can't find any PTEs issued. I realize these loans have been around forever and a there are probably hundreds of thousands outstanding, but I am still not getting why they are OK.

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