Participant loans from 401(k) plans have never been an employer favorite plan provision. (See Defined Contribution Plan Loans Can Be Expensive, @401k_TV). Now participant loans from 403(b) plans have come into focus.
It’s in the form of a class action law suit recently filed by participants in the Was hington University 403(b) plan against TIAA. The Plaintiffs allege that TIAA violated several provisions of ERISA regarding the manner in which loans were administered.
The Short Version
In virtually all retirement plans with loan provisions, the participant borrows against his or her account. The participant repays the loan and interest to his or her own account.
According to the Complaint, TIAA does it a different way to the detriment of the plan participant who takes a loan. TIAA requires plan participants who wish to borrow money from their account to deposit 110% collateral into a TIAA Retirement Loan certificate, its own investment fund.
So here’s the core of the issue. While the participant’s collateral continues to earn interest, they do not receive the full amount of interest paid on the loan. Plaintiff is seeking class action status “on behalf of the Washington University Plan and all other similarly situated retirement plans that are serviced by defendant and that offer participant loans.” How much money is involved? An amount estimated to be in excess of $50 million. You can read the long version here.
ERISA attorneys will provide the detailed legal analysis, but the plan consultant in me sees two immediate takeaways.
First, 403(b) plan loans not only get on the radar screens of plaintiff attorneys, but the Internal Revenue Service and the Department of Labor.
From which follows the second takeaway. 403(b) plan sponsors should review their loan provisions, and if necessary, get them fixed.
Picture Credit: Can Stock Photo