401K Loan - How Is Prime Interest Rate Determined?

[R. Scott]

Which Federal website are other TPA's using to see what the current "prime" interest rate is when processing participant loans when the document says the interest rate to be used is "prime plus ___%"?

Moody's, Wall Street and Bloomberg are all showing different prime rates...

Are TPA's just trusting the pre-populated rate that comes through from the recordkeeper instead of checking on it themselves?

Thanks.

[justanotheradmin]

Wall Street Journal Prime rate. I've never seen any other Prime rate used for retirement plan loan purposes. 

And no - the TPAs I know of check it - but some recordkeepers only update theirs once a month even if the rate changes in the middle of the month, as long as it is consistently applied to new loans I've never heard of an issue with it. 

[Paul I]

A Prime Rate is the interest rate a commercial bank will give for its customers with the lowest credit risk.  Banks use the Federal Discount Rate as the basis for setting the prime rate for the bank's customers.  The Federal Discount Rate is the interest rate the Federal Reserve charges banks for short term loans.  The Federal Discount Rate is the same for all banks, but the incremental points added by a bank to determine its prime rate can vary.  This is why different sources can show different prime rates.  Further, changes in bank prime rates typically are made based on a bank's procedures for how and when to change rates.  This can lead to differences in the timing of changes.

A plan's document or loan policy should specify the source used to determine the interest.  Regulations include saying the plan should set plan loan rates based on commercial bank rates available in the geographic area in which the plan is located.  Most plans use a "prime rate plus" formula for simplicity (although the IRS has commented that prime plus 1% is too low, but there does not seem to have been any enforcement to back up the comment).

@R. Scott there is not Federal web site involved, and it does seem the WSJ is the most common source, although this is not univesal.  As @justanotheradmin notes, some recordkeepers update loan interest rates once a month even though almost all changes in the FDR and hence prime rates occur on a different date.  Take care to confirm that the plan document or loan policy is consistent with the process the recordkeeper is using.

Most TPAs do check the loan interest rate for a loan.  A participant may submit an application for a loan for approval and the plan's loan interest rate could have changed during the loan initiation process.  This may lead to sorting out which interest is applicable to the loan.