Ask the Experts December 9, 2014

(b)lines Ask the Experts – Processing 403(b) Loan Defaults

“I have some questions as to  how 403(b) loan defaults are processed.
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“I realize that, once a participant defaults on a loan, it’s a deemed distribution and a 1099R is issued. But what should happen to the participant’s account? Is it reduced by said distribution? And what happens to the outstanding loan? Is interest still accumulating on the deemed distribution? How is such interest reported going forward?”  

Michael A. Webb, vice president, Cammack Retirement Group, answers:

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Unfortunately, the Experts cannot provide answers to many of these questions, as such answers will vary according to the contract provisions of the vendor that issued the loan. Thus, it is extremely important to have a thorough understanding of the vendor loan agreements so that these issues may be addressed, and to contact the vendor if there is ambiguity. This is especially true in connection with defaults, due to the negative consequences of a loan default to a plan participant.

However, the Experts can make some general statements as to the consequences of loan defaults as stated in the loan regulations under Code Section 72(p), as follows:

1) A participant will not be able to re-borrow after default unless a) payroll deduction is permitted for loan repayments or b) secured by additional collateral held outside of the plan (a rare event in the Experts’ experience). However, see “Ask the Experts: Permitting Loans After a Loan Default” for an exception to this rule

2) Interest that accrues after a loan default will NOT result in additional deemed distributions reportable on a 1099R. However, accrued and unpaid interest following a loan default, will be considered part of the “highest outstanding balance in the prior 12-month period” in determining how much a participant may re-borrow if eligible for another loan.

3) If loan repayments are made following a loan default, such repayments will be treated as after-tax contributions to the plan. However, such contributions will NOT be subject to the nondiscrimination and other rules (e.g. contribution limits) that would normally apply to after-tax contributions. As after-tax contributions, such post-default loan repayments will not be taxable upon distribution.

Thank you for your questions, and be certain to examine your loan agreements thoroughly!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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Participants December 8, 2014

Fees Still Baffle Plan Participants

The majority of Wisconsin retirement plan participants still do not understand the fees they pay in a workplace-based retirement plan, according to a recent survey. 
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Despite fee disclosure rules from the Department of Labor (DOL) that went into effect in 2012, about 80% of plan participants still struggle to understand the fees they pay for their plans, reports Francis Investment Counsel, a registered investment adviser (RIA). One-quarter “haven’t got a clue.” Nearly half (48%) said they have “received information in the past but don’t really understand the fees.” A handful (6%) said fees “don’t really matter.” Just 21% said they have “a good grasp of what I pay to participate.”

“Not being able to save enough” was the biggest retirement savings obstacle (40%), followed by concerns about “health care costs” (29%). Thirteen percent said “losing money in the market” was their biggest obstacle; 11% were concerned about “Social Security disappearing”; and 6% were concerned about an “insecure future at my job.”

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Most participants want some guidance, the survey found, with a majority (81%) saying they do not want to make investment decisions on their own. Instead, they would prefer to “learn about my situation and help me decide what to do.” More than half (66%) said they prefer to receive retirement planning and investment help through “one-on-one advice sessions,” and only 3% said they would turn to “online tools,” the same percentage who said they would prefer receiving retirement planning and investment help from family or friends.

“Clearly there is more work to be done to help participants understand the fees they are paying,” Kelli Send, senior vice president of participant services at Francis Investment Counsel, said in a statement. “Simply making an online retirement planning tool available to participants doesn’t seem to be the answer.”

According to Send, the survey results indicate demand for personalized, face-to-face advice and show that participants at all income levels want someone to sit down with them to understand their unique situation and come up with a strategy that works for them.

Francis Investment Counsel conducted its survey of 1,400 plan participants at Wisconsin-based employers over 18 months. Respondents answered questions about retirement saving obstacles, retirement education, advice preferences and plan fees. The employers are clients of Francis Investment Counsel and represent a variety of industries, including health care, manufacturing and professional/technical.

Francis Investment Counsel LLC, in Brookfield, Wisconsin, is a fee-only RIA that provides investment consulting and employee education services to the qualified plan marketplace.

Full survey results are available by emailing Stephanie Truog at Stephanie@Lowecom.com or Kelli Send at Kelli.Send@Francisinvco.com.

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