RatherBeGolfing Posted December 9, 2019 Share Posted December 9, 2019 I'll take a stab at this since I know Larry will correct me if I'm mistaken ? In a self directed plan, A has $50k mutual funds and a $50k note In a trustee directed plan with loans treated as a segregated investment, A has $50k mutual funds and a $50k note In a trustee directed plan with loans treated as an investment of the trust, A and B both have $100,000 account balances, sharing 50/50 in the investment earnings, which is now $150k mutual funds and a $50k note. In 1-3 above, the loan is secured by the A's account balance (assuming that the plan does not require additional security). Here is where I struggle with 3: - If A defaults without a distributable event, does the loan stay on the books until A has a distributable event? Or does it offset without a distributable event? - If A does not have enough left in his/her account balance to cover the loan in the event of a default, what happens? Lets say that distributions and significant investment losses have left A's account balance $10k short of his/her loan obligation at default. Link to comment Share on other sites More sharing options...
RatherBeGolfing Posted December 9, 2019 Share Posted December 9, 2019 2 minutes ago, Bird said: I'm not Larry but it's the latter (my bold), and so be it. The loan is a riskless investment to B, and in today's environment, probably paying 5% +/-. It's superior to any other riskless investment, which might pay 1-2% at best. So if you put a loan and mutual funds on a risk/reward spectrum, it could be argued that the loan is actually a better investment than mutual funds (that is not really the point but it is a sound argument). Bottom line for me remains that this is fine...although we might have a heart to heart talk about the perception of it, in these particular circumstances, which are probably unusual. Is it really riskless though? see my questions above on default? There has to be more than a 0% chance that As account balance will not be able to cover the loan obligation in the event of a default. Even if A's distributions (in service, since termination would trigger an offset) are limited to amounts that exceed the loan obligation, investment losses to the loan's security are still risk, no? Link to comment Share on other sites More sharing options...
Bird Posted December 9, 2019 Share Posted December 9, 2019 6 minutes ago, RatherBeGolfing said: Is it really riskless though? see my questions above on default? There has to be more than a 0% chance that As account balance will not be able to cover the loan obligation in the event of a default. Even if A's distributions (in service, since termination would trigger an offset) are limited to amounts that exceed the loan obligation, investment losses to the loan's security are still risk, no? Mmm. Well, my initial rebuttal would be that if an in-service distribution is permitted then that could/would trigger an offset, but I suppose it could be a hardship. As I said (I think) way back, if the loan defaulted then we would indeed carve it out. I suppose in a scenario where A takes a loan and does not default, then takes a hardship, there could be risk of loss to B. Someone would have to work pretty hard to create that scenario and I like to think that at some point we'd say "wait a sec, this loan needs to be carved out" and take action to do so. Ed Snyder Link to comment Share on other sites More sharing options...
Kevin C Posted December 9, 2019 Share Posted December 9, 2019 On 12/6/2019 at 8:23 PM, Larry Starr said: Well, in the mid to late '70's, I worked for the insurance company that was the largest small plan service provider in the country; I actually set policy on many of the issues we were figuring out back then. And almost all of those plans were pooled in those days (well over 95%), and they were all handled as noted above. 4 out of 5 dentists may prefer loans treated as pooled investments, but that doesn't make the 5th dentist wrong. I never said your method was wrong. I said it hasn't been done that way anywhere I've worked. It comes down to a judgment call and there is more than one "right way". Link to comment Share on other sites More sharing options...
Larry Starr Posted December 9, 2019 Share Posted December 9, 2019 30 minutes ago, Kevin C said: 4 out of 5 dentists may prefer loans treated as pooled investments, but that doesn't make the 5th dentist wrong. I never said your method was wrong. I said it hasn't been done that way anywhere I've worked. It comes down to a judgment call and there is more than one "right way". No disagreement; just pointing out that there is at least one large example of where it was being done "my way" in the '70's. Lawrence C. Starr, FLMI, CLU, CEBS, CPC, ChFC, EA, ATA, QPFC President Qualified Plan Consultants, Inc. 46 Daggett Drive West Springfield, MA 01089 413-736-2066 larrystarr@qpc-inc.com Link to comment Share on other sites More sharing options...
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