Loans remain with provider, or transfer with plan?

[401king]

We took over a plan a few months ago that had outstanding loans. We posted the loans to our system and participants have since been making loan repayments to their new accounts.

Now the participants with loans have received invoices from the previous provider for loan payments (loans were repaid quarterly). I contacted the previous provider who stated that "Loans for clients do not transfer to new carriers." I've only been doing this a few years, but I have never heard of that and can't find any information on it.

It's my assumption that loans are part of the plan, and if the plan transfers then the loans come with it. How could we accurately keep records (top-heavy test, vested account balances, keeping participants under max loans outstanding, etc.) without this information?

Maybe this is totally normal and I've just never dealt with it...I sure hope that's not the case.

[Guest Sieve]

Loans are between participant and trustee. I'm no TPA, but they should transfer--for all the reasons, and more, that you mention. Does Service agreement with old provider indicate otherwise?

[K2retire]

We ran into this recently as well. The prior service provider was an insurance company. The loan documents that the clients signed to receive the loan specified that they could not be transferred to another provider. So far, they will not budge on that issue and have retained sufficient other assets to serve as collateral for the outstanding loans. They say they intend to transfer available cash to us on an annual basis.

If you find a solution, I'd love to hear about it!

[Guest Sieve]

If that matter is not addressed in the prior provider's service agreement (probably regarding termination of the provider's services), I'd let the prior service provider know that it is violating the terms of that agreement--no matter what the loan documentation says (since the loan documentation's references to limitations on the sponsor's actions ought not be enforceable if it appears on a document the sponsor does not sign).

Exactly when did the sponsor--who selects/deselects the provider/custodian, and appoints the trustees, etc.--agree that certain assets could not be moved from the old provider? Certainly NOT in an agreement between the Trustees and a participant!--and, besides, a participant cannot agree to limit the ability of the sponsor to fire the provider.

[K2retire]

The paperwork that they prior provider required to be signed before they would agree to transfer the assets specified that loans were not transferable. Unfortunately, the plan sponsor did not notice that provision before signing it.

[rcline46]

Very common with insurance cos. THey issue a loan against the assets of the ins co. and do not liquidate plan assets, they put a lien on the assets.

Some cos. will liquidate assets to pay off the loan on a transfer, others will keep assets and release them as the loan is paid off. In the latter case, the new provider will collect the payments and send them to the ins. co., and the ins co will periodically release assets to the new provider. A real PITA.

[401king]

Thank you all for the responses. This, too, is a situation involving an insurance company. I literally have 4 emails from different people saying "I have cc'd xxxxx on this email who will be assisting you." Still, I have yet to find someone who will actually be of any assistance.

Now I'm just crossing my fingers that they don't have the original loan documentation to prove that loans do not transfer, or that a phrase to that effect doesn't exist in the documents.

I'm just not sure how this company makes money on these outstanding loans, unless of course there is a annual loan fee but it has to be barely worth it considering they will have to transmit data annually to my company.

[K2retire]

We also wondered why on earth they would WANT to keep the loans.

[rcline46]

The loans are an asset of the insurance company, and they keep the interest paid on the loans. For those looking into the 403(b) market this is a VERY BIG issue which needs to be resolved before a takeover begins.

[K2retire]

So how do they qualify as a plan loan? And if they are not a plan loan, how does the insurance company get around the anti-alienation rules? The plan I'm dealing with is a 401(k) -- not a 403(b).

[rcline46]

Assets in the participant's account are pledged as security for the loan. This is perfectly legal for a plan loan. This is just another way of issuing the loan instead of liquidating assets. In a down market not so good, in an up market, the participant gets the asset performance rather than just the interest on the loan.

[GBurns]

Where is it in the documentation that a partcipant agrees to pledge a portion of his account ?

rcline46

Isn't there a difference between a "plan loan" and a provider loan?

[rcline46]

If you read the rules for the loan, the participant's security for a loan is up to 1/2 etc...... Note nothing here says to liquidate, only security. I will bet the loan form says participant pledges his security.