Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, September 11, 1995 TAG: 9509110023
SECTION: MONEY PAGE: A8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
Credit is often near at hand for people who have these and similar plans to which they - and usually their employers as well - make regular contributions toward retirement.
A new survey by William M. Mercer Inc., an international human resources consultant with an office in Richmond, found that 196 pension plan sponsors out of a sample of 260 companies allow their worker-participants to borrow against their retirement savings balances. That's three in four of the companies.
Donald J. Potter, president of Financial Strategies, a pension and investment consulting firm in Roanoke, said the ability to borrow against those savings plans is a popular feature among employees.
But Potter said only larger companies can entertain the idea of permitting their workers to borrow. Smaller companies, he said, are stopped by the complications of setting up such a system and the issues of compliance with federal law.
In the Mercer survey, 97 percent of the companies said they have loans outstanding against plan balances. Moreover, at many of these companies, upwards of a fifth of plan participants currently had plan loan obligations.
The borrowers are typically lower-compensated employees rather than executives, senior managers or professionals, Mercer said.
Such loans, because of their ready availability and interest rates far lower than other credit sources, are popular with employees, the survey suggests. Besides, in many cases the interest an employee pays on loans from retirement savings is credited to his savings.
"Regardless of whether employees ultimately decide to borrow from their savings plan, the availability of a loan encourages a higher percentage of non-highly compensated employees to participate in a plan," said Amy Reynolds, who specializes in defined contribution services for Mercer.
"However, if employees paying back a loan no longer contribute to their plan, the loan could have a negative effect," Reynolds said.
Workers must repay their borrowings from the retirement accounts with interest, but they are really paying interest to themselves. The loans must be repaid, or the amount borrowed will be subject to income tax and a 10 percent penalty.
Potter said the loans are a good deal unless an employee leaves the company. In such a case, he said, an employee who has been repaying a loan through payroll deduction suddenly finds the entire amount is due.
If that happens, Potter said, the employee must repay the outstanding balance immediately or else take the amount as a distribution from the plan, triggering taxes and penalties.
American workers who are highly mobile in their jobs may find some "nasty complications" if they try to leave while owing money to their pension fund, Potter said.
The Mercer survey found that the minimum amount available for a plan loan is $1,000 at 78 percent of the companies.
The maximum term for repayment among the survey participants is as much as 30 years, for a loan intended for home financing. Terms for other loans range between three and five years.
Employees are limited by 65 percent of the companies to having only one outstanding loan at a time, Mercer found in its survey.
Also, 60 percent of the companies charge participants fees on loans. Most often, this is an initiation fee to cover the administrative costs of processing the loans.
Mercer said only 11 percent of the companies have totally automated their loan application process through use of interactive telephone technology. The survey found that 37 percent use a combination of voice response and paper. The majority, or 52 percent, rely exclusively on paper forms.
Additionally, the survey found loan modeling - to calculate various loan alternatives - was available to participants at 81 percent of the companies, often through interactive technology.
Typically, Mercer said, the interest rates charged on plan loans were modest compared to other sources of credit. Employees, in effect, pay interest charges to themselves. In most cases, such interest payments were added to the employee's account balance, helping to build the retirement plan.
Among the 64 companies surveyed whose plans do not include a loan feature, Mercer said, roughly half explain the omission on grounds that borrowing against savings is contrary to the philosophy of a retirement plan.
About the same percentage cited the administrative burden as the reason for lack of a borrowing feature.
Mercer said only a scant 3 percent believed employees would be disinterested in borrowing against their retirement plan balances.
by CNB