Retirement Plan Loan Protection for Participants

August 16, 2012 at 1:08 pm Leave a comment

Plan Adviser has a press release by Rebecca Moore about adding 401(k) loan protection for retirement plan participants on their website. Located at http://www.planadviser.com/Firm_Rolls_Out_401k_Loan_Protection_Campaign.aspx, the article describes a firm that is creating insurance to protect against loan defaults in 401(k) plans. Certainly, there are participants that default on loans. A well crafted loan procedure can help reduce the chances of defaults through payroll deduction. The problem comes in when participants lose their jobs and cannot afford to repay loans. I am unconvinced at this time that enough participants are defaulting on loans to justify loan protection inside the retirement plan.

If a participant is concerned and wants to buy such insurance outside of a plan, that would be fine with me.  With the complexities of reporting life insurance within a plan, there would be much debate in the industry regarding how such insurance would be handled.   My opinion is that participants should be informed of and understand the risks of taking a loan.  Ultimately, it is the plan sponsor’s responsibility to decide whether loans are in the plan’s participants best interest.  If the majority of participants are defaulting on loans, removing the provision may be a better option.

If adding the insurance, plan sponsors will still need to carefully review the insurance to ensure it is appropriate to the plan and in the best interest of participants.  If the participant covers the cost, they will need to determine if the expense is reasonable.  I would certainly not be advising clients to take this step. My concern is that it is being pushed by insurers concerned more about profit than legitimate interest in plan participants.  If you feel otherwise or have other concerns, feel free to comment below.

Thanks for reading and have a wonderful day!   Please be sure to sign up for my blog, and follow me on twitter @ChristineGurney.

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Christine Gurney

A pension professional who shares her thoughts and ideas about the pension world for industry members and anyone else interested.

@ChristineGurney

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