Last week, I asked NewsDash readers, do you engage in efforts to discourage participant loans, and do you think those efforts work?
Responding readers were nearly evenly split between those who do use education or plan loan features to discourage participant loans (43.5%) and those who do not (52.2%). Slightly more than 4% of respondents said their plans do not offer loans.
However, when asked if these efforts work, responses largely swung toward the negative, with 68.2% saying they do not think efforts to discourage participant loans work, and 18.2% saying they work for some participants and not others. Nearly 14% said they believe these efforts do work.
Few chose to make verbatim comments, but many that did were of the same mind that participant loans are not always “evil” and sometimes necessary. Another recurring theme was there’s only so much that can be done to discourage loans. Editor’s Choice goes to the reader who said: “It is hard to discourage something that is allowed by the plan, TWO TIMES.”Thank you to everyone who participated in the survey!
Our plan's loan policy requires that any current loan balance must be re-financed into a new loan, within only one loan remaining at the end of the re-financing. When applying the 72p regs, this really helps to cut down on the amount available for loans.
I'd rather see Life Insurance removed before loans, but getting rid of loans is a big issue also.
I don't try to encourage or discourage these but instead try to inform participants about all caveats and nuances. Sometimes a loan makes sense. An employee can pay the money back with interest to themselves versus paying consumer interest rates which are higher to someone else. If their job seems stable, for a short term loan it may just makes sense.
To coin a TV commercial tagline, "it's my money and I want it now". Since 'loans' are one of the few available access points for active participants, we've chosen to treat participants as adults - deserving or not.
Some participants can be discouraged but others will take a loan as soon as they have money available.
It is hard to discourage something that is allowed by the plan, TWO TIMES.
It seems that once a participant takes the first loan, any subsequent loans are much easier.
Even when confronted with all the negative aspects of taking out a 401k loan, they all still take the loan to meet pressing expenses. I don't think many are taking out loans for wants so much as for needs.
We've never allowed loans in our plan since first adopted in the 70's!
All you can do is make sure the participant understands the long term ramifications of taking the loan. After that it is up to them to make the decision as to whether the long term detriment is worth the short term benefit. You can't make the decision for them, though. Sometimes it's the only option they have or the best of an array of bad options.
Especially in the 2009 downturn, participants were certain they would take out a loan. A pamphlet, conversation, hard facts...nothing changed their minds. Now that the economy is better there have been no requests for loans, so I'd say it was more self-regulating than education driven. Everyone was fully aware, before seeing me, of the penalties and taxes they would incur. We seem to have savvy employees who would rather not touch the money. No one has ever taken a loan to go on a cruise or some other luxury item...each loan was based on survival need.
Some employees believe it's better to "pay themselves" the interest cost than paying the bank.
I really do wish people would quit treating participant loans as an unmitigated evil that has to be thwarted or stomped out at all costs. It's as though you've never been in a real financial bind and had nowhere else to turn. The vast majority pay back loans before termination, and those who don't would have had that balance distributed to them at that point regardless. And please, let's not forget that some people want to solve this nonexistent problem by banning them all together - think about the impact on participation rates or levels then! Come live in the real world, people, and get down off your "high horse."
NOTE: Responses reflect the opinions of individual readers and not the stance of Asset International or its affiliates.