Sunday, May 22, 2011

Loan Arranging

The headlines last week were all about how new legislation had been introduced to cut down on the “leakage” from 401(k) plans.

That leakage, roughly defined as pulling money out of retirement savings before retirement, has been a concern of many for some time. About once a year, someone puts out a report about the number of outstanding loans from these programs and/or the uptick in hardship withdrawals (see IMHO: Double Dipping) ; and, from 2008, see IMHO: Safety “Net”). Not surprisingly, with the sluggish U.S. economy and the so-called jobless recovery, people seem to be dipping into these accounts at higher rates. And yet, for all the hyperbole around such things, the actual rate seems to be pretty consistent (allowing for differences in the data samplings).

That said, last week, Senators Herb Kohl (D-Wisconsin) and Mike Enzi (R-Wyoming) introduced the Savings Enhancement by Alleviating Leakage in 401(k) Savings Act of 2011 (the SEAL Act), which, among other things, was designed to “[limit] the most 401(k) loan practices that provide easy access to retirement funds but adds costs and fees to pension plans” (see “Legislation Aims to SEAL 401(k) ‘Leakage’”).


From the bill’s summary, the only real “limitation” on loans was capping the number outstanding at any one time to…three. Beyond that, it gave participants longer to stave off having an outstanding loan turned into a “deemed distribution” (a euphemistic term for treating that loan you previously took out as a distribution and subjecting it to income taxation), and it allows participants to continue making contributions after taking a hardship (the current six-month restriction being a vestige of the sense that if you could afford to keep contributing after taking a hardship, you really weren’t in a hardship situation). The SEAL act would ban 401(k) loan debit cards—but did anyone ever think THAT was a good idea?

Now, I’m sure that keeping those repayment windows open longer will compound someone’s recordkeeping headaches, but it seems to me a reasonable means of giving participants time to restore that money to their retirement accounts, rather than simply forking over a big chunk of it to the IRS. Moreover, I think we all know that a properly administered hardship request can alleviate the hardship without imposing a six-month “penalty” on retirement savings (and matching contributions). As for “only” letting participants have three loans out at one time—well, IMHO, that’s hardly a limit at all.

In fact, headlines notwithstanding, the bill might have been more accurately (if less acronymically melodic) titled the “Making It Easier for Participants To Repay Outstanding Loans and Keep Saving” bill.

All in all, the legislation may or may not actually forestall 401(k) leakage, but IMHO, it’s certainly a plumber’s helper.


—Nevin E. Adams, JD

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