Loan source recommendations for new plan?

[Guest RSnyder316]

We're setting up our company's first 401(k) plan and merging our money purchase plan into it. Loans will be a new feature for us. I'm looking for some advice on whether to make all sources of funds available for loans, or to limit loans to employee & rollover sources.

The recordkeeper will prorate loan proceeds across all vested money types.

Our first thought was to not let loans be made on employer money, with the thinking behind that being that as an employer we want to make sure the money is there for retirement, not for pre-retirement needs.

All opinions are welcomed! Thanks.

Rick

[MWeddell]

There was a GAO study a few years ago that had some amazing statistics indicating that offering loans in a 401(k) plan had a very significant impact on participation and contribution rates, especially the latter. Hence, even if one assumes that all of the dollars actually loaned out provide no retirement savings (which obviously is wrong), that study's statistics said it was still a good idea to provide loans.

With that in mind, actually loaning out money does undercut retirement savings. It's the perception that loans are available that you are aiming for, not the loans themselves.

With that in mind, I generally suggest that loans be made only from employees' contributions and limited to 1 loan maximum per participant at any point in time.

[Guest FREE401k]

All of our clients' 401(k) Plans allow loans from any source of money, but of course are subject to the 50% collateral requirement so someone with a $10,000 balance can only borrow $5,000. Our clients also only allow "hardship loans," which means they only loan money for the hardship withdrawal safe harbors: uninsured medical expenses, tuition, buying a house, etc. So participants can get to their money if they really need it without suffering the penalties of a hardship withdrawal, but they can't spend their retirement savings on big screen TVs and vacations.