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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
from Spencer’s Benefits Reports: Approximately 15% of households with 401(k) plan accounts have outstanding loans, according to the 2007 Survey of Consumer Finances conducted by the Federal Reserve Board. While the percentage of loans has not changed since 1995, there has been an increase in the percentage of 401(k) plan borrowers reporting that their loan was for “investment or debt consolidation,” from 36% in 2004 to 52% in 2007. Similar figures were reported in the 2008 study from the Transamerica Center for Retirement Studies (27% in 2006 borrowed “to pay down debt,” versus 49% in 2008).
“Many 401(k) loan-eligible households carry relatively expensive consumer debt that could be more economically financed via 401(k) borrowing,” contended Geng Li and Paul A. Smith, authors of a study released by the Federal Reserve Board entitled New Evidence on 401(k) Borrowing and Household Balance Sheets (2009-19). “In the aggregate, we estimate that such households could have saved as much as $5 billion in 2007 by shifting expensive consumer debt to 401(k) loans. This would translate into annual savings of about $275 per household–roughly 29% of their overall interest costs–with larger reductions for households that carry consumer debt at high interest rates or who hold larger 401(k) balances.”
The cost for a non-401(k) plan loan is the after-tax interest rate that is paid to the outside vendor. In contrast, the lower interest rate for a 401(k) plan loan is paid to the participant’s account, causing it to grow. The authors noted that a participant who is trying to maximize 401(k) plan contributions but is constrained by the contribution limits “might prefer a 401(k) loan with a sufficiently high interest rate simply as a way to get more assets into the tax-favored account.”
The authors suggested four reasons why 401(k) plan participants do not take out more loans from their 401(k) plans to avoid high consumer loan interest rates. First, they might be concerned about the opportunity cost of forgone asset gains while the loan is outstanding. Second, they might be adverse to the risk of losing their jobs and having to repay the loan in a short time frame. Repaying the loan when income during unemployment is at a premium can be a “quite damaging” prospect, the authors noted.
Third, participants might be acknowledging that they have self-control problems in spending, and that by “walling off” their 401(k) plan account, they are making sure that it is unavailable for current consumption. Finally, the authors contended that participants might be confused about the potential advantages of 401(k) plan borrowing. “They may simply be making a mistake,” the authors concluded.
For more information, visit http://www.federalreserve.gov/pubs/feds/2009/200919/200919pap.pdf.
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