Fiduciary Loan Regulations for 401(k) Plans: Best Practices for Plan Sponsors

Description

ERISA regulations characterize participant loans as plan investments. The Department of Labor (DOL) takes the position that participant loans are subject to the fiduciary responsibility requirements as any other investment. Counsel and plan sponsors must focus on the challenges and fiduciary implications when providing participant loan programs, handling defaults, and fulfilling all regulatory requirements.

Many 401(k) plans allow participants to borrow amounts from their accounts and repay them through payroll deductions over time. Lack of procedures and administrative mistakes by plan sponsors can cause delays and ultimately lead to loan defaults, which result in unexpected tax consequences to plan participants and other issues prime for litigation.

Because participant loans are investments under ERISA, they are subject to the same prudent investment criteria and scrutiny by regulatory authorities requiring fiduciaries to review the investment to ensure it benefits the plan and meets reporting requirements.

ERISA counsel and plan sponsors must establish practical procedures to implement and review participant loan programs of 401(k) plans. Proper guidelines for managing loan defaults and complying with ERISA and IRS rules will limit claims regarding the fiduciary practices of plan loans.

Listen as our panel discusses the critical issues associated with participant loan programs in 401(k) plans, reporting requirements, fiduciary oversight and practical methods in managing defaults.