Loan Repayment Application To Participants Investment Options

[Guest CPA]

Any guidance or comments would greatly be appreciated.

I have a client who has a 401k PSP (profit sharing plan). The Plan document is silent regarding how participant loan repayments are to be applied to the participants investment options. The Plan document allows participants to borrow up to 50% of the participants elective deferral balance.

Currently, the loan repayments are applied to the participants investment accounts from which the loan was taken. I do not necessarily think that this is incorrect.

I am looking for guidance for when a 401k PSP is silent regarding loan repayments.

- Are the loan repayments suppose to be applied to the investment account from which it was borrowed?

- Are the loan repayments suppose to be applied in accordance with the participants current investment allocation election form?

- Or, should the Plan specifically address this item? And since it doesn't, and until the Plan document is amended to address this, what or who determines the application of the loan repayments.

Thank you in advance for any assistance!

[Belgarath]

Most plans have a provision that the Plan Administrator/Trustee has the sole authority to interpret and implement the terms of the plan. In a situation where the document is silent on the account(s) to which repayments should be allocated, I think it would be reasonable for the Administrator to take either of the two approaches you outline, as long as they do it consistently.

I agree it would be nice if the plan specified...

[Guest Pavlick]

Most recordkeeping systems are going to have either option available to you, but from a practical sense I can't imagine why you would post back to the original fund. Over a five year loan period, the plan can easily make a handful of fund option changes, and the 'original' fund may not be available. (Not to mention the possible change of service providers, which can involve a wholesale change of ALL investment choices). Then you have to make a mapping judgement call, which is dangerous.

As a participant, I would expect my money to go where my current preferences are......not what I was doing back in late 90's . (For example, suppose you work for KMart or Enron.....would it make sense to have loan repays buying shares of those investments?)

[Guest CPA]

Thank you to both of for your comments. I trully appreciate your comments.

Pavlick,

I agree with your comments 100%. I had a conversation with the TPA (actually, the CEO of the TPA) regarding this when I became aware of this policy. The TPA was very defensive when I merely inquired about this policy.

However, I did not have any other basis to stand on besides commen sense. I was hoping to find a Reg. that required the TPA to follow the current investment allocation election form.