Participant Loan Interest Rates - Does this satisfy "commercially reasonable rate" requirement?

[Guest ActuaryWannabe]

One of the attorneys we (a TPA) do business with is telling his clients that they may take participant loans with an interest rate equal to the current "applicable federal interest rate" that is used by the IRS for imputing interest on an interest-free loan. This concerns me because that rate, for a five year loan, would be approximately 3.85% at present. That seems kinda low, doesn't it?

[QDROphile]

The IRS is does not set that rate based on the commerical rates for loans such as plan loans. I would not use the rate because the fundamentals don't satisify the requirements. I don't care if at one time or another the rate happens to be correct because of coincidence. However, the plan fiduciary is charged with determining the rate. If the plan fiduciary is instructing you, the most you can do is make a polite inquiry, suggestion, or protest to prevent any implication that you were somehow responsible. If the rate is outrageious, more radical action may be required. A TPA is always in danger of being determined to be a fiduciary.

[MWeddell]

Not only does the rate seem low, but also pegging the loan interest rate to the applicable federal rate doesn't appear to me to comply with the standard set forth the DOL loan regulation for how to determine the interest rate.