Learning objectives describe the features of a plan

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Learning Objectives Describe the features of a plan loan. Explain why plan loans are both popular and dangerous. Describe general vesting requirements. Identify a proper vesting schedule for a DB plan. Identify a proper vesting schedule for a DC plan. Identify the three timing stages of retirement that a company can select internally.
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Overview of Plan Loans The American culture is driven by the availability and use of loans. Loans can be a very useful tool that greases the wheels of capitalism. But, they can also be a tool that enslaves people who spend more money than they really have to spend on items that are wants and not needs. Within the world of retirement savings, participants are allowed to take loans from certain types of retirement savings vehicles. Loans are permitted within all qualified accounts and within 403(b)s. Employers with these plan types may offer a loan program out of each participant's account, but they are not required to do so. It comes down to a choice by the company’s management. Plan loans are not available within SEPs, SIMPLEs, or any other plan type which is funded by an IRA. They are most commonly offered within 401(k)s and 403(b)s. It is possible to allow them within either a straight defined benefit plan or a cash balance plan, but the exponential administrative hassles typically encourage those employers to forgo them. The simple reason why they are offered is to encourage plan participation. If the employees know that they could still access their retirement savings in the event of a real need, then they may be more inclined to participate. Higher participation makes compliance testing (like the ADP/ACP testing and 410(b) coverage rules) much easier to pass. The logic behind plan loans runs counterintuitive to the stated purpose of retirement planning. If money is withdrawn from a retirement account to create a personal loan, then that same money is not compounding within the plan. I have seen this work favorably in one situation. Imagine a poor stock market environment. Perhaps even a negative year. A certain participant’s 401(k) assets are declining in value as is the general market. The participant takes a personal loan from their 401(k) to buy a car. They are paying 4% interest on their plan loan. To whom are they paying this interest? They are paying it to themselves! As they make their loan payments, covering both principal and interest, they are re- deposited into their 401(k) account. They are effectively earning 4% on that block of money while their other assets may be declining with the general market. However, this is a risky bet. For this client, the market just happened to be nearly a net zero return during the tenure of their loan. They were lucky, but this is a very rare circumstance.
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  • Spring '14
  • VOSS,JAMESA
  • Cash balance plan, HCES

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