Big, Awesome Recordkeeper With a Bad Policy

[austin3515]

A large record-keeper that most of us know and love has a funny policy. If you are 59.5 and want an in-service distribution of your entire non-loan account, but you have a loan outstanding, then you are not permitted to do so. You are not permitted to a take distribution that will reduce your non-loan account balance below your participant loan balance. Their opinion is that you are violating the collateral requirements.

The EOB is perfectly clear on this, the 50% limit is determined on the date of the loan only.

The recordkeeper went on to tell me that this rule does not apply to a hardship because the hardship rules require you to take loans first. I explained that this completely negates all logic and reason that might otherwise have supported the position.

Esteemed pension gurus, what say you?

[hr for me]

I know back in the day where I worked for a large recordkeeper, some clients wanted that policy and we had it for some. There is the misunderstanding that it is collateral, when it really isn't. But it's hard to make clients understand that. It sounds like this recordkeeper is doing what's easier to explain. However I have to ask what does the plan document say?

[austin3515]

There is no such restriction in the document. They have a policy in place to get this requirement waived, which we are going to do. I am totally shocked by this though.

[ESOP Guy]

If you want to get academic about it the whole collateral idea is silly. Even in a balance forward plan the loan is self collateralizing. If you default on the loan your account balance goes down by the amount of the loan defaulted. The plan and no other participant can suffer a loss. In a daily plan it is all the more obvious no one is hurt.

The only possible exception to this would be those very rare balance forward plans that had the loans as part of a general bond/fixed income fund and thus the loan was a general asset of anyone in the plan. But those were so rare back in the day of balance forward plans and now my guess next to none exist.

To use an extreme example that violates the rules. If I have a $10,000 account balance and I got a $10,000 loan some how then defaulted how would anyone suffer for the lack of collateral?

My account balance would go to zero the same as if I had just gotten an in-service distribution of my whole balance.

[jpod]

We all realize the silliness of the rule but if you don't want to get into a PT fight with IRS or DOL you play by the rules. However, the record-keeper's "rule" is not one of those rules.

[austin3515]

ESOPGuy, Philosophy is not a pre-requisite for 401k compliance

[MoJo]

Hmmm. I know of at LEAST three large recordkeepers that have "funny" policies regarding loan collateral. In my mind (and I believe this has been confirmed to be the "right" mind by the comments above - and the appropriate regulatory bodies) the only collateral necessary is the NOTE held as a plan asset (usually within the account of the borrower). There is that little "pesky" requirement that you can only borrow 50% of your account balance - BUT THAT IS NOT A COLLATERAL REQUIREMENT - it is simply a restriction on the amount of the account that is loanable.

Indeed, one of those recordkeeper goes so far as to NOT loan the participant money from their own account - but rather loan it to the participant from the recordkeepers OWN FUNDS - requiring a like amount to invested in the plan's "traditional GIC" account (as "collateral"), where it's locked up for TEN YEARS (for a max 5 year loan).

Not saying who that recordkeeper is - but one would think educated participant's (like "teachers" - and the fiduciaries overseeing such plans) would find such provisions objectionable, but I see it often in "non-profit" and educational institution plans....

[austin3515]

Does it rhyme with MIAA-TREF?

[hr for me]

The ones I saw in the good old days were balance forward plans (not daily's) so I suspect the fact that the funds were very mingled probably had something to do with it. But even then, the loan interest went directly back to the employee who took the loan (wasn't shared with the whole plan or even a whole fund).

I haven't seen any where the recordkeeper loaned money outside of the participants own funds. In that case, I can see where collateral is necessary to pay the loan back should they default. But I didn't work on any MIAA-TREF type accounts (LOL)

[MoJo]

"Does it rhyme with MIAA-TREF? :unsure:"

Why do I keep hearing bells - going:

Ding ding ding ding!

Like someone just won a prize????

[shERPA]

There is something about working for big awesome recordkeepers that engenders flawed thinking.

[austin3515]

Which is why they should leave the thinking to the TPA's

[K2retire]

"Does it rhyme with MIAA-TREF? :unsure:"

Why do I keep hearing bells - going:

Ding ding ding ding!

Like someone just won a prize????

Ah, but they are not the only ones doing something like this. A certain insurance company that I know if will not transfer loans when a plan moves to a new record keeper because the loans are made from insurance company assets.

[401king]

"Does it rhyme with MIAA-TREF? :unsure:"

Why do I keep hearing bells - going:

Ding ding ding ding!

Like someone just won a prize????

Ah, but they are not the only ones doing something like this. A certain insurance company that I know if will not transfer loans when a plan moves to a new record keeper because the loans are made from insurance company assets.

We found this out the hard way after taking over a plan from (un)said insurance company. The loan payments had gone to their new 401k accounts for a few months before the participants began receiving "Overdue" notices from insurance company. I'm still surprised the DOL allows it.

[K2retire]

"Does it rhyme with MIAA-TREF? :unsure:"

Why do I keep hearing bells - going:

Ding ding ding ding!

Like someone just won a prize????

Ah, but they are not the only ones doing something like this. A certain insurance company that I know if will not transfer loans when a plan moves to a new record keeper because the loans are made from insurance company assets.

We found this out the hard way after taking over a plan from (un)said insurance company. The loan payments had gone to their new 401k accounts for a few months before the participants began receiving "Overdue" notices from insurance company. I'm still surprised the DOL allows it.

I found out about it in a similar fashion when I asked the deconversion for the loan information. Sadly, the business owner had taken a $50,000 loan the week before the black out period began.