Retirement Loan Eraser May Help Plan Sponsors Avoid Audits

Helping participants maintain retirement savings in their accounts and improve their retirement outcomes is in the best interest of participants, so it is a fiduciary obligation for plan sponsors.

In addition, panelists who spoke at the 2016 PLANSPONSOR National Conference noted that the greater the number of participant loans and the greater the number of loan defaults a plan has, the greater the likelihood of an Internal Revenue Service (IRS) or Department of Labor (DOL) audit.                  

So, it makes sense to prevent loan defaults. Tod Ruble, CEO of Custodia Financial in Dallas, says this is especially true for participants who face circumstances beyond their control—the participant’s death, permanent disability or involuntary job loss.

To help with this, Custodia has launched Retirement Loan Eraser (RLE), a guaranteed loan protection program that protects retirement plan accounts from leakage. The insurance will pay off the loan in one lump-sum to prevent default. The payment includes the outstanding balance upon default, plus accrued interest, Ruble says.

Ruble explains there are two ways to offer the protection. Some organizations want to make RLE available to participants and have them make the decision. When the participant is making the decision, she is made aware of the availability of protection through the automated website from the plan recordkeeper at the time of borrowing. Or in the case of RLE Direct, plan sponsors decide it is best to cover all employees and purchase the protection as a plan expense.  “It is almost akin to buying fiduciary insurance,” Ruble says. “Plan sponsors are maintaining fiduciary obligations and improving outcomes for participants.” RLE Direct can be paid for by the plan sponsor, the plan or the participants. 

“It doesn’t change any loan protocols, the loan will just have this insurance embedded in it,” Ruble adds. “There is no change to the plan document, summary plan description (SPD) or the plan’s loan policy.”

Retirement Loan Eraser also includes important communications to participants. “We use our relationship to communicate with participants. When they first select coverage, we congratulate them on being covered and explain what the protection provides and when. We stay in contact from the point they borrow,” Ruble says. “Then if they lose their job, we immediately contact them and remind them of the protection. We essentially tell them to not cash out because their account will be replenished. That’s the point when participants need to be guided the most.”

He adds that Custodia also provides numerical data to participants showing the retirement savings they will miss out on if they cash out at that time. “In the case of the median $4,600 loan, a full cash out can cost as much as $265,000,” he notes.

Ruble says, after seven years of hard work and a significant investment in the program, he feels it is finally getting the traction it deserves. “We wanted to make sure in dealing with recordkeeping platforms, plan sponsors and advisers, we didn’t create a program with unintended consequences, so we soft-launched late last year, and had it tested by large recordkeepers that took it to their client advisory boards to get feedback about what would make it important and make them willing to use the solution,” he notes.

Custodia took that feedback and revised the program, making it actionable and available. The company has two dozen plans in various stages of adoption. Eight to 10 million participants will have access to Retirement Loan Eraser by the end of first quarter next year. It is now available to the jumbo plan market with support of major recordkeeping platforms.