The loan they never take may make all the difference

Today, there's a good bit of debate about how participant loans affect long-term retirement outcomes.

IRS rules provide for participant loans and hardship withdrawals from 401(k) and other plans. They're not required, but rather left to the discretion of you, the plan sponsor. Today, there's a good bit of debate about how participant loans affect long-term retirement outcomes.

On one hand, it's not hard to appreciate that employees may be more motivated to enroll in your company plan if it includes a loan feature since it provides comfort that they'll be able to access their savings in the event of an unforeseen need. On the other hand, we know if your employees take loans, they'll likely not defer more during the period of time they're making loan payments. In doing so, they risk falling behind their long-term savings goal. And in some cases people default on their loans and fall even further behind. One option to consider is to limit loans to covering hardship events like certain medical expenses, buying a principal residence or paying for school tuition and fees. Doing this may discourage more casual use of a loan while still making it available for situations of real need.

Loans are meant to be repaid, of course. Hardship withdrawals, by contrast, are not. They are allowable early withdrawals and absolutely reduce an employee's retirement account balance. The use of participant loans and hardship withdrawals point to another problem - namely that too many people don't have savings or emergency funds outside of their retirement plan account. It's no wonder that too often they look to their retirement account in times of financial stress. This, in turn, limits our mutual ability to help your employees create good retirement outcomes.

In this environment, it's essential to try to help your employees learn how to think more critically about how they spend their money, how they budget, and how they make choices about taking on debt because success here translates directly to greater confidence and preparedness to save for their future.

Questions?

Contact Brad Bechtel using the information below to talk about how we can work together to educate and guide people to true financial wellness. The result may be the loan they never take, and that may make all the difference.

Brad Bechtel

Senior Vice President
Employee Benefit Services

Brad Bechtel leads AGH’s employee benefit services (EBS) division, which serves clients nationwide. EBS is one of the region's largest providers of retirement plan recordkeeping services for daily valuation plans. The division provides consulting services to clients on employee benefit plans, including plan design, implementation, operation, fiduciary due diligence, compliance, and through affiliate AGH Wealth Management, discretionary and non-discretionary investment fiduciary services, investment advisory services and employee education.

Bechtel is experienced in executive compensation, including non-qualified, phantom stock, top hat and excess benefit plans, as well as other deferred compensation approaches. He has consulted for numerous Fortune 500 corporations on investment management and fiduciary due diligence. He also provides search and selection due diligence consulting services for companies seeking new investment and recordkeeping providers for their qualified plans. Bechtel is a registered investment advisor who holds Series 7, 24 and 66 FINRA registrations, and he is a member of the American Society of Pension Professionals & Actuaries.

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