Plan Sponsors Ask...
Second Quarter 2011
Q: What documentation should the plan have regarding plan loans to participants?
A: The starting point is to verify that the plan document permits loans. Assuming that it does, a detailed loan policy should be prepared. This would include the administrative procedures for determining the minimum and maximum loan amounts a participant may be granted, the reasons for which a loan can be requested and how the loan term and interest rate will be determined. The policy should also address missed repayments, default, leave of absence rules and what happens when a participant with a loan terminates employment.
A loan application is also necessary. On this form, the participant indicates the loan amount requested, and acknowledges receipt of a copy of the loan policy and any other documents to enable him or her to fully understand the loan’s terms and conditions.
You will also want to have a formal loan approval document which confirms the terms of the loan and administrative details, such as when payroll deduction repayments will begin.
Most plans also require a promissory note. The note includes the participant’s promise to repay the loan and the key loan terms, such as the amount borrowed, the interest rate and the repayment schedule.
The Internal Revenue Service offers questions and answers about retirement plan loans athttp://tinyurl.com/IRSFAQsLoans.
Q: Are there new ways of structuring the employer matching contribution to increase saving by plan participants?
A: Analysis recently completed by the Principal Financial Group shows that a new way of designing the match does improve participant contributions. A review of over 100,000 participants’ saving behavior indicated that participants contributed more to their 401(k) plans when the fixed match targeted higher contributions.
With a match formula of 100 percent up to 2 percent of pay, the average participant contribution was 5.3 percent. There was slight increase (to 5.6 percent) in the participant contribution when the match was 50 percent up to 4 percent of pay. The contribution rate rose significantly, to 7.0 percent, when the match formula was 25 percent of the first eight percent of wages, even though the employer’s total contribution did not change.
The conclusion is that even when the employer match remains at two percent, the higher target deferral does result in participants saving more.
In addition, the analysis found that there was no negative impact on participation rates when the match was stretched to a higher level.
Q: Are many plan sponsors adopting the Roth 401(k) conversion feature?
A: A new survey from Mercer found that only 31 percent of plan sponsor respondents say they will allow Roth conversions by the end of this year. Another 24 percent plan to add the feature at some point in the future. The remaining 45 percent have no plans to add this option.
Reasons cited by sponsors for waiting include seeing if employees express interest (37 percent), determining when recordkeepers will be prepared to administer conversions (34 percent) and seeing what other plan sponsors will do (23 percent).