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ERISAatty

IRS has a new position on plan loan interest rate??? Anyone dealt with this?

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But setting standards stifles the creativity of the auditors. Who wants audits where all the same parameters must be followed?

Not me. My fees would suffer. I'd be spending a lot less time preparing for and responding to auditor requests, thus lowering my billable hours.

I think we need MORE ambiguity, not less!

;)

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Someone surprise me and post a link to a study, report, article, whatever, that shows that allowing loans from a Retirement plan enhances or may enhance the benefits that any participant in the plan can expect at retirement, compared to not allowing loans. (My apologies if that sounds grumpy.)

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GMK, I think the allowance for loans stems from a (perceived?) participation issue, rather than a benefit at retirement issue.

Offer the opportunity to have at least some access to the money and more people can be induced to participate.

Good for the employees--they are saving for retirement

Good for management--more rank & file participating, the better for allowable HCE deferral rates

Good for asset providers--more assets under management, income from fees (though that offsets the AUM)

Good for the brokers/agents--more commissions

Good for the TPA--generate fees for processing and administering loans

Good for the economy--proceeds from loans going to either pay off debt or purchase goods and services

Good for CE providers--yet another webinar they can charge for

See a downside yet? I don't. ;)

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Someone surprise me and post a link to a study, report, article, whatever, that shows that allowing loans from a Retirement plan enhances or may enhance the benefits that any participant in the plan can expect at retirement, compared to not allowing loans. (My apologies if that sounds grumpy.)

Challenge accepted: http://www.nber.org/programs/ag/rrc/NB09-05,%20Beshears,%20Choi,%20Laibson,%20Madrian.pdf

It appears to be primarily via the mechanism that BG notes... higher participation and deferral rates due to access to the money.

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I agree, BG, that it's probably a perception of increased participation (as masteff has shown as I type), and I agree that more plan expenses means a boost for the economy. After all, THE issue is jobs (at least it was at election time). I look forward to reviewing the paper. Thanks, masteff.

Obviously, I think that a retirement plan is to provide retirement benefits and not for a "rainy day" fund. But others may like the added fun of issues like those addressed in this thread.

From what I read (and have seen), the surest way to high participation rates and high HCE deferral rates is to offer a safe harbor match on deferrals to, say, 5% and implement auto enrollment at the 5% deferral rate. Few people choose not to participate, and not having to determine if HCE deferrals need "correction" at the end of year reduces plan administration time .

From a fiduciary point of view, I will read the paper masteff linked to find out how loans enhance anyone's retirement benefit. I can see how a loan adds a risk of reducing the borrower's retirement benefit (money not invested, or worse, don't pay it back). If it would be prudent for a non-banker plan sponsor to hire appropriate help to set interest rates and administer loans and avoid errors (payroll deductions missed, etc.), should those expenses be paid from (reduce) participants' accounts?

Thanks, again.

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In a bear market, a (shorter-term) loan can be a boon, as you will repurchase shares at lower prices than originally sold.

It's a type of market timing that may or may not work out for the participant.

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I'm not a fan of plan loans generally, as they do introduce "leakage" into the retirement system. But for participants who are 30 - 40 years from retirement, I appreciate from their end it looks like a long time to "tie up" their money. Yes it is in their interest to do so, and all that time is on their side in terms of accumulating retirement savings, but that's not the perspective of most younger employees. And it is their money after all.

From a policy perspective a loan program is probably a reasonable compromise to help encourage retirement savings while still providing access that is not heavily penalized by taxes (assuming it is paid back timely).

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Perhaps I am misinterpreting. If the request was, "I am trying to determine how to set a plan loan rate and the ERISA standard is the rate a commercial elnder would charge for a loan like the plan loan," Key Bank gave a facile, narrow, formalistic answer that did not help to achieve the goal of setting an interest rate. The facile, narrow, formalistic answer could have been a legitimate prelude, accompanied by some laughter, followed by a serious answer about what interest rate should be used.

If the question was, "What would be the interest rate on a commercial loan that has exactly the characteristics of a plan loan?'" maybe you got a helpful answer. In any event you felt like it was helpful. So what did you then do about interest rates with all that help? You did not have an interest rate that you could defend by saying that in fact you had consulted with a commercial lender.

You know, I was part of that project team - as a representative from the legal department as an ERISA attorney - and I can assure you it was not a "facile, narrow, formalistic" approach subject to some laughter.

The project came about quite legitimately as a result of the OCC regulator overseeing the $80 Billion dollar bank with $120 Billion dollars in trust assets (the successor to the famed "Cleveland Trust Company" - trustee to the Rockefeller fortune (still to this day), who determined that the risk to the bank as service provider and trustee concerning compliance with loan regs was one that had to be "controlled" through a well thought out, documented investigation and process.

We spent over six months on the project, exploring every angle of the requirements, the characteristics of plan loans, similarities to commercial, corporate and personal loans, and developed a "Trust Policy" that, to this day, is part of the regulatory framework under which Key operates it's trust business.

It was a valuable process - even though the conclusion was there were no comparable loans against which to benchmark plan loan rates, and hence we justified (to the satisfaction of the OCC) to use "industry standard" rates of prime plus.

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Of course, "we" (the retirement plan community as a whole) have allowed plan loans to reach their illogical conclusion via multiple loans and refinancings.

I think I've said it once before but the one time I personally used a plan loan (to finance some minor remodeling on the home I'd just bought), I viewed it as a piece of my portfolio and adjusted my investments accordingly. If you look at model portfolios, even the most aggressive suggest you hold a % in bonds/stable value, so I simply viewed the fixed return on my plan loan as fulfilling that %.

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I stand by my comments from the perspective of a plan adminstrator and what was in the post. As an ERISA attorney, you understand that the primary function of an advisor is to solve client problems, not to come up with accademic answers. The plan admnistrator has a problem and a standard. The problem is to determine an interest rate. The standard is what a commercial lender would charge. If that is where the question is coming from, a conclusion by the bank that there is no comparable loan in the lender's normal universe is unhelpful.and all of the efforts and technical work that went into the conclusion were narrow and formalistic. I might concede "facile," but the effort missed the point and failed to do the job insofar as you described it. You did not say in your descriptions what you said in your last sentence, "we justified *** use [of] *** rates of prime plus." That is the point and that was useful, assuming that the "we" is the bank. It meant that a commercial lender had determined a rate that was reasonable to charge for a plan loan. A plan adminstrator can use that conclusion to meet the standard. If the "we" is the plan administrator, you did a fine job and made the most of inadequate service from the bank.

Also, If the question came from another angle or had another purpose, then the effort may have been brilliant and herioc. In fact, I agree with the academic conclusion. A plan loan as usually provided under 401(k) plan is an artificial anomaly that the the regulations try to dress up with some conventionality, with resulting illusions, confusion, and contradictions.

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In a bear market, a (shorter-term) loan can be a boon, as you will repurchase shares at lower prices than originally sold.

Thanks for that, BG. I agree it could be a plus if your timing is good. Of course, the benefit is reduced, because the loan repayments are after-tax dollars (another record keeping expense and distribution complication for the plan).

Masteff - An interesting article. Seems to focus on overall results. Participation might increase. Average contributions do increase, although they do not distinguish how much of this effect is because higher paid's get to defer more.

They conclude that the positive effects of loan availability on savings rates are experienced by all participants, whereas only a few take the loans. I'm not sure what this means, but again I suspect that a major effect is that the cap on savings rates for HCE's is higher. (They don't discuss this.)

And then for the 2.5% (which seems like a big percentage) of participants who default, there's a big cut in retirement benefits and immediate taxes and often the 10% penalty.

Thanks again for the comments and the article. and have a nice day ... or else. :)

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I stand by my comments from the perspective of a plan adminstrator and what was in the post. As an ERISA attorney, you understand that the primary function of an advisor is to solve client problems, not to come up with accademic answers. The plan admnistrator has a problem and a standard. The problem is to determine an interest rate. The standard is what a commercial lender would charge. If that is where the question is coming from, a conclusion by the bank that there is no comparable loan in the lender's normal universe is unhelpful.and all of the efforts and technical work that went into the conclusion were narrow and formalistic. I might concede "facile," but the effort missed the point and failed to do the job insofar as you described it. You did not say in your descriptions what you said in your last sentence, "we justified *** use [of] *** rates of prime plus." That is the point and that was useful, assuming that the "we" is the bank. It meant that a commercial lender had determined a rate that was reasonable to charge for a plan loan. A plan adminstrator can use that conclusion to meet the standard. If the "we" is the plan administrator, you did a fine job and made the most of inadequate service from the bank.

Also, If the question came from another angle or had another purpose, then the effort may have been brilliant and herioc. In fact, I agree with the academic conclusion. A plan loan as usually provided under 401(k) plan is an artificial anomaly that the the regulations try to dress up with some conventionality, with resulting illusions, confusion, and contradictions.

I could not agree more.

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