Loan repayment from personal account

[ombskid]

A company called Securian Financial has a program using daily valuation but takes loan payments directly from participant's personal checking accounts rather than run them through payroll.

Client has plan that allows too many loans and has constant battle keeping them straight. The savings in clerical seems to be worth the switch. Any thoughts on that porcess and possible employer liabilities?

Anybody with experience with this company?

[chc93]

No experience with that company. But loan payments don't have to run through payroll. Problem with participants writing personal checks and sending in on their own... they inevitably forget. Never saw a direct transfer from participants checking account, but would imagine problems with over-drawn checking accounts, associated fees, etc... maybe worse that participant sending in personal checks and forgetting a few.

Any reason for not running through payroll?

[ESOP Guy]

If you changed to this system you would need to check the loan notes on any legacy loans to see if the change can be made.

Most plan notes, which are contracts, bind the parties to payroll deductions. To switch without an agreed to modification to the contract could be seen as a breach of contract.

To me the real issue is the plan administrator has a fiduciary duty to make sure they have a reasonable belief the loan will be paid back and to adjust the interest rate for any increase in risk of it not being paid back. The great thing about payroll deduction is as long as they person is working the plan gets paid. A person could easily tell Securian about an account that might not have enough money in it. In fact could this set up become a backdoor in-service withdrawal provision for some people? They purposefully set up an account that will default on the loan to get their money from the plan.

Less cynical is what if they simply spend all their money as fast as they earn it and while they planned on paying the loan back the money isn't there? Once again I seem to recall the rules require there is a reasonable expectation the loan will be paid back as the terms have to be the same as what is commercially available.

[GMK]

ombskid - either your client has the expertise to manage the fiduciary responsibilities of offering loans (and not just the payment issues) or needs to hire such expertise or should consider not offering loans. After all, it's a RETIREMENT plan, not a bank.

My apologies for shouting. To me, the idea of plan loans is like a roaring flame about 3 feet tall.

[My 2 cents]

I would expect that, as far as the regulatory authorities are concerned, the plan provisions governing loans ("allows too many loans and has constant battle keeping them straight") must be strictly followed, MONEY BEING NO OBJECT (like GMK, I apologize for shouting). Operational failures concerning the granting and administration of loans cannot be excused because it would have cost more to do it right. As I recall, the costs of plan disqualification are pretty substantial, and it seems to me also that a jury could well hold the plan fiduciaries liable if a participant claimed to have been damaged by the consequences that arose from the plan administrator having failed to restrict access to loans above the plan's limits. Think how Ford made out, having explicitly weighed the costs of fixing the design of the Pinto versus their assessment of how much would have to be paid out as a result of litigation.

[GMK]

^ That's an applicable analogy, but at least Ford is in the business of making cars. My message to plan sponsors is that this is but one of many examples that show that retirement plans are out of their depth when they try to be in the banking business, unless the fiduciaries are bankers.

[hr for me]

Agree with the others. I don't think where the payments are funded from is your largest problem, but if the plan is already having admin problems with loans, this isn't going to solve any of those issues (and possibly make it worse since you don't have the automatic wages to pull from)

I do monthly auto-billing for two of our companies where the payment is less than $50 a month (I wear a lot of different hats) and will tell you that payments attached to either CC/debit cards or Electronic Fund Transfers (EFTs) decline/reject for at least 10% of the payments that we initiate/request. Sometimes it is just a closed/changed account. Sometimes there truly is not enough money and many times different banks have different timing on what goes in or comes out first. I am not sure that the admin time to deal with a 10% failure is worth it when you have an immediate draw from a payroll check and might be more than you are currently experiencing with "too many loans..constant battle keeping them straight". You might be jumping from one bad place to another.

Definitely explore the number of declines and the process for dealing with them. It's not fun to them try to collect, and we dont' have a law like ERISA and taxable consequences to deal with!