Fiduciary Loan Regulation

We have posted many articles regarding plan governance and how a properly governed plan leads to a very successful plan.  The attached article does a great job of outlining the responsibilities plan fiduciaries have in managing the participant loan policy.

Several government studies have proven that retirement plan leakage has been a problem for many years.  A substantial amount of leakage is the result of participants terminating with outstanding loan balances.  Whether this is a voluntary or involuntary termination of employment, if the participant does not have the means to repay the outstanding loan balance within the allotted time period after termination, the income tax consequences could place a financial hardship on the participant.

This leads to an important question for plan fiduciaries.  If a participant is going to be terminated involuntarily due to a reduction in workforce or poor job performance, and the participant applies for a loan, should the loan be granted?  Based on the content of the attached article, the fiduciaries of the plan could create a fiduciary breach by granting the loan to the participant.

In closing, a prudently structured and administered loan program can be beneficial for participants.  Now would be a good time to revisit the Plan’s loan policy to coordinate with the new hardship distribution rules.

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