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"Why isn't my loan balance still invested?"


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This is an actual question I received from a client. I tried to explain that when a loan is taken, the funds are removed from the account and given in cash, so they cannot be invested in the plan because they aren't in the plan. They get reinvested according to the participant's allocation elections as they are repaid. He then asked why the loan balance was shown on a report as an asset of the plan, and I tried to explain that the loan balance was basically an account receivable at that point. After several additional exchanges, he asked for some regulatory information to support what I was saying.  

This left me at a loss, because this is such a basic concept that I cannot fathom there being any regulatory information about this. I even tried but couldn't find anything. Anyone have another way to try to explain it?  

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The loan is the investment. When I take a loan from my plan, the money does not leave the plan; I am just liquidating $50k from ABC Mutual Fund and moving it into a different investment. Instead of moving it into XYZ Mutual Fund, I am moving it into a note that promises 4% interest per year. Repayments are transfers from the loan investment back into ABC Mutual Fund.

I hope that makes some sense. Although, it sounds like this individual is struggling with some basic concepts about what a loan is. If I borrow your car for the weekend, can you go for a drive on Saturday night? No, because I have your car. Does the car still belong to you? Of course it does.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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4 hours ago, C. B. Zeller said:

The loan is the investment. When I take a loan from my plan, the money does not leave the plan; I am just liquidating $50k from ABC Mutual Fund and moving it into a different investment. Instead of moving it into XYZ Mutual Fund, I am moving it into a note that promises 4% interest per year. Repayments are transfers from the loan investment back into ABC Mutual Fund.

I hope that makes some sense. Although, it sounds like this individual is struggling with some basic concepts about what a loan is. If I borrow your car for the weekend, can you go for a drive on Saturday night? No, because I have your car. Does the car still belong to you? Of course it does.

Ding Ding Ding!  We have a winner.  What C.B. say!

and we've gotten this question too....  Trouble is, in the not for profit space, there are still providers that are the lender (not the plan), and some think that's the only way.  TIAA, you know it's true.  😜

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  • 3 weeks later...

I participated in a plan where the loan *is* an asset of the plan and therefore it is an asset for all participants.  It's not exclusively an asset of the individual account.

That plan did *not* have participant-directed investments though, so not many plans could do this.

But a participant could use this as leverage for his/her overall portfolio with the risks that always come with leverage plus the risk of not being able to repay the loan upon termination.

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