May 20, 2019

Participant Loans: A Fiduciary Storm Brewing?

Los Angeles partner Bruce Ashton authored an article for PLANSPONSOR titled “Participant Loans: A Fiduciary Storm Brewing?” The article discusses the fiduciary risk that defined contribution plan sponsors could face when participants default on plan loans.

Bruce notes that the fiduciary duties related to participant loans have not received much attention, partly because “in the defined contribution plan era, we’ve focused almost entirely on accumulation of retirement savings.”

However, plan sponsors and the retirement industry are beginning to pay closer attention to retirement savings adequacy and other factors that can leave participants without enough money to have a decent retirement. A 2018 Deloitte study estimates that loan defaults will drain $2.5 trillion from the system over the next 10 years.

Bruce advises that plan sponsors should consider raising their periscopes and reviewing their loan programs, rather than just sitting back and hoping for smooth sailing. “That means evaluating the default activity in their plans, but also taking action—such as including loan insurance—to go beyond disclosure to satisfy fiduciary duty, mitigate risks and, most importantly, improve retirement outcomes,” Bruce said.

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