A recent article in the Central New York Business Journal focused on the issue of 401(k) loans, a feature that has gained popularity with employees in light of the current downturn in the economy and the tightening of credit standards.

Although popular with employees, 401(k) loans can be an administrative headache for employers who have to process them, keep track of payments and treat delinquent or loans in default as distributions. The article points out that the recent introduction of the 401(k) debit card can reduce the administrative burden for employers. However, the ease of the card can also come at a price. Many worry that employees will be too quick to borrow from their long-term savings in order to meet short-term needs. Also, those who fail to pay back their 401(k) loans can suffer stiff penalties in the form of a 10% early withdrawal fee in addition to the income taxes owed on the withdrawal.

As a result, employers should give careful thought to whether they want to offer the loan feature to their 401(k) retirement plan. If employers trust that their employees have a good understanding of the pros and cons associated with 401(k) loans, they may want to offer this feature. If they think their employees may have trouble repaying the loans, they might want to think twice about offering them.

NADART gives its Plan Sponsors the choice of whether to offer 401(k) loans to the employees. Plan Sponsors also have a choice of offering one or two loans as the maximum number of loans available to participants. If you are interested in learning more about NADART’s retirement plans and features, please contact a NADART Representative at (800) 462-3278, ext. 7161 or e-mail nadart401k@nada.org.