When it comes to identifying the main drivers of 401(k) plan leakage, plan loans come in a close second to the cardinal sin, frivolous early distributions (the dreaded Bass Boat Factor). In a recent blog post, Adam Miloro of Longfellow Advisors traces the tax ramifications of plan loans and the dire consequences of defaults on them, most of which follow a separation from employment. Miloro offers a couple of ways to limit the damage plan loans can cause:
• Allow just one outstanding loan at a time
• Limit plan loans to hardship reasons only
Left unsaid is the fact that restricting participants’ access to their 401(k) funds depresses participation and contribution rates. Solving this problem — and doing a better job of educating plan participants about being smart about their use of plan loans — will go a long way toward solving the leakage problem.
What’s your take on the best way to address the plan loan dilemma? Start a thread in the comment box below.
