Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
Excellent question! Typically, it is not so much that the vendor does not allow for loans, but that the particular annuity contract/custodial agreement that is being utilized does not contain a loan provision. Years ago, this was commonly the case with custodial agreements, but newer agreements from most providers do indeed contain loan provisions.
With respect to annuity contracts, some fixed annuity contracts prohibit loans to preserve the liquidity of the contract, as outflows due to loans may hinder the ability of the provider to obtain more favorable rates of return that are dependent on a consistent amount of investable assets. Finally, some providers restrict loans because they are simply unable to recordkeep loans. Furthermore, in plans with multiple providers, even where all providers could offer loans contractually, the plan sponsor may limit loans to a single provider in order to ensure compliance with the rules regarding loan limits, which are more difficult to administer when multiple vendors can offer loans.
If you are a plan sponsor, and one of your providers does not offer loans for reasons of which you are unaware, the Experts would suggest that you simply ask the provider why loans are not offered. The Experts have seen cases where a provider who did not previously offer loans was able to accommodate a request to add a loan provision. But remember, if your plan utilizes multiple providers that offer loans, the amounts borrowed will need to be coordinated at the plan level to ensure that the loan limits are not exceeded.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.