Retirement Loan Eraser Now Helps Those Who Voluntarily Terminate Employment

Custodia Financial has expanded its Retirement Loan Eraser (RLE), which has helped retirement plan participants avoid defaulting on a 401(k) loan when they experience involuntary job losses, to now also cover participants who voluntarily change jobs. This new product is called RLE+.

RLE is a specialty insurance program that is included in a 401(k) loan at the point of loan origination. In the event of involuntary termination, death or disability, RLE repays the balance, thereby avoiding the loan default and ensuing taxes, penalties, lost earnings and, for some, preventing a cashout of their entire balance.

RLE+ expands that coverage to include participants who terminate employment voluntarily but are at risk of defaulting on their loan. RLE+ will keep the loan current for an additional three months to allow time for engagement, education and counseling to help the participant take advantage of a post-termination loan repayment program and avoid default.

RLE and RLE+ can be delivered by integrating them with either the payroll or recordkeeping system. Custodia supports the ongoing delivery and servicing of the participant through both web and call center support.

For the typical loan, which is below $10,000, the average cost is approximately 3% annually, which may be offset by the sponsor by lowering their plan interest rate. Either the participant or the plan sponsor can pay for the loan.

Citing a study by Deloitte Consulting, Custodia notes that over the next 10 years, retirement plan leakage caused by 401(k) loan defaults will exceed $2 trillion. The total impact of this loan leakage includes the cumulative effect of loan defaults at retirement, including taxes, early withdrawal penalties, lost earnings and the early cash out of the defaulting participant’s full plan balance. Custodia estimates that this could amount to $300,000 in lost retirement security over a career.