Coupon loans? Why a bad idea?

[BG5150]

I'm trying to talk a client (a big client) out of having coupon loans.  They don't want to take on the responsibility of taking money out of people's paychecks.

I'm trying to go the "you need to be reasonably sure these loans will actually get paid off, and coupon loans makes this job very difficult" route.

Any other thoughts?

[QDROphile]

In addition to the determination by the fiduciary that the loan is reasonably expected to be repaid (for which pay deduction is extremely helpful), If a loan is not timely repaid, the fiduciary is put in the position of having to decide what to do about it, such as foreclose on security (as required by the fiduciary to decide that the loan would be repaid), or other enforcement or collection action. Whoever is in the fiduciary position needs some education about the fiduciary aspects and a little fear to impress about the responsibility that is seldom given appropriate attention. 

[Peter Gulia]

Has the plan’s administrator found a service provider to collect payments on the participants’ loan obligations?  Or do you fear the administrator expects BG5150 to provide that service?

 

About a fiduciary’s responsibility, a participant loan might be or become a nonexempt prohibited transaction “where the subsequent administration of the loan indicates that the parties to the loan agreement did not intend the loan to be repaid.”  29 C.F.R. § 2550.408b-1(b)(3).

[Larry Starr]

8 hours ago, BG5150 said:

I'm trying to talk a client (a big client) out of having coupon loans.  They don't want to take on the responsibility of taking money out of people's paychecks.

I'm trying to go the "you need to be reasonably sure these loans will actually get paid off, and coupon loans makes this job very difficult" route.

Any other thoughts?

The client is an idiot?  Unless they are paying the employees in cash, they already have a built in system to handle the payroll deduction repayment on a basically automatic basis.  We set up all loans (the few we have) on a payroll deduction payment method and the payments are tied to the dates of the payroll.  All the client has to do is send the check in to the plans investments, which they would have to do with the funds received with the coupon also.