ERISA Advisory Council Offers Advice on Loans, Withdrawals

The ERISA Advisory Council has published its recommendations on facilitating lifetime plan participation.

Following up on a series of meetings last year, the council outlined a series of recommendations for plan sponsors and the Department of Labor to help preserve retirement savings. 

Specifically, the council said that plan sponsors could:

1. Discourage or disallow hardship withdrawals until all loan options have been exhausted. The council’s report noted that, since loans are generally repaid (except when there are outstanding balances at termination of employment), they are less likely to harm retirement incomes.

2. Ensure that participants understand that when taking a hardship withdrawal, both their contribution and matching contributions stop for six months, and by losing the match they are foregoing these matching dollars.

3. Automatically reenroll participants at the end of the six-month hardship period, and require the participant to take affirmative action if they do not want to re-enroll. This report said this could address the inertia problem just as automatic enrollment has greatly increased participation in 401(k) plans.

4. Restrict the leakage of the employer match. For example, sponsors could disallow the employer match as a source for loans or withdrawals until retirement, even if the employee terminates employment. Mark Iwry of the U.S. Treasury Department specifically suggested this alternative for sponsor consideration.

5. Allow loans to continue after termination of employment and allow the initiation of new loans after termination. The report said that allowing loan initiations after termination of employment would encourage terminating employees to keep their money in the plan, and would allow terminating employees with cash needs to keep their money in the plan rather than cash out and incur potential tax penalties. However, the council only lent its support for this approach in plans that already provide loans, acknowledging that loans continued or initiated after termination “…are more difficult and expensive to administer and the paperwork on them is more difficult,” and noting that it is hard to stay in touch with former employees.

6. Reduce the number of loans that participants can take at any one time.

7. Impose a waiting period after a participant pays off a loan before becoming eligible to take another loan.

8. Charge a lower fee to the accounts of terminated employees without loans, since they are less work for the sponsor (if they are not making new contributions or have a loan). 

The council also had some suggestions specifically for the Department of Labor, explaining that the DOL could:

1. Educate plan sponsors about the above alternatives.

2. Create model transfer forms, model loan forms and processes for all plans to use to make it easier for plan sponsors to facilitate these transactions.

3. Encourage sponsors with plan loans to consider loan initiation and continuation after separation. 

Additional information on the council’s recommendations, and the testimony presented, is available here.