Products August 17, 2016

Retirement Loan Eraser May Help Plan Sponsors Avoid Audits

“It is almost akin to buying fiduciary insurance,” says Tod Ruble with Custodia Financial. “Plan sponsors are maintaining fiduciary obligations and improving outcomes for participants.”
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Helping participants maintain retirement savings in their accounts and improve their retirement outcomes is in the best interest of participants, so it is a fiduciary obligation for plan sponsors.

In addition, panelists who spoke at the 2016 PLANSPONSOR National Conference noted that the greater the number of participant loans and the greater the number of loan defaults a plan has, the greater the likelihood of an Internal Revenue Service (IRS) or Department of Labor (DOL) audit.                  

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So, it makes sense to prevent loan defaults. Tod Ruble, CEO of Custodia Financial in Dallas, says this is especially true for participants who face circumstances beyond their control—the participant’s death, permanent disability or involuntary job loss.

To help with this, Custodia has launched Retirement Loan Eraser (RLE), a guaranteed loan protection program that protects retirement plan accounts from leakage. The insurance will pay off the loan in one lump-sum to prevent default. The payment includes the outstanding balance upon default, plus accrued interest, Ruble says.

Ruble explains there are two ways to offer the protection. Some organizations want to make RLE available to participants and have them make the decision. When the participant is making the decision, she is made aware of the availability of protection through the automated website from the plan recordkeeper at the time of borrowing. Or in the case of RLE Direct, plan sponsors decide it is best to cover all employees and purchase the protection as a plan expense.  “It is almost akin to buying fiduciary insurance,” Ruble says. “Plan sponsors are maintaining fiduciary obligations and improving outcomes for participants.” RLE Direct can be paid for by the plan sponsor, the plan or the participants. 

“It doesn’t change any loan protocols, the loan will just have this insurance embedded in it,” Ruble adds. “There is no change to the plan document, summary plan description (SPD) or the plan’s loan policy.”

NEXT: Important communications offered

Retirement Loan Eraser also includes important communications to participants. “We use our relationship to communicate with participants. When they first select coverage, we congratulate them on being covered and explain what the protection provides and when. We stay in contact from the point they borrow,” Ruble says. “Then if they lose their job, we immediately contact them and remind them of the protection. We essentially tell them to not cash out because their account will be replenished. That’s the point when participants need to be guided the most.”

He adds that Custodia also provides numerical data to participants showing the retirement savings they will miss out on if they cash out at that time. “In the case of the median $4,600 loan, a full cash out can cost as much as $265,000,” he notes.

Ruble says, after seven years of hard work and a significant investment in the program, he feels it is finally getting the traction it deserves. “We wanted to make sure in dealing with recordkeeping platforms, plan sponsors and advisers, we didn’t create a program with unintended consequences, so we soft-launched late last year, and had it tested by large recordkeepers that took it to their client advisory boards to get feedback about what would make it important and make them willing to use the solution,” he notes.

Custodia took that feedback and revised the program, making it actionable and available. The company has two dozen plans in various stages of adoption. Eight to 10 million participants will have access to Retirement Loan Eraser by the end of first quarter next year. It is now available to the jumbo plan market with support of major recordkeeping platforms.

Data & Research August 17, 2016

Looking Back 100 Years for Insights on Millennials

A new TD Ameritrade survey report likens the mindset of Millennial investors to that of workers living in the wake of the Great Depression, nearly a century ago. 
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The TD Ameritrade 2016 Millennials and Money Survey suggests Millennials “may have more in common with their depression-era counterparts than their Boomer parents or grandparents.”

Of the more than 1,000 Millennials surveyed, a solid majority (62%) identified themselves as proactive savers, while 80% have a budget. The vast majority does not yet feel financially secure, but most (85%) anticipate reaching financial stability and independence in the foreseeable future.

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According to the TD Ameritrade research, Millennials’ affinity for savings means most (77%) would “stash an extra $1,000 in a savings account instead of the stock market.”

“The Silent Generation and Millennials came of age during a major financial crisis, which increases the propensity to save and financial conservatism,” explains Matthew Sadowsky, director of retirement and annuities at TD Ameritrade. “Further adding to Millennials’ financial anxiety is the economy, student debt, and escalating peer influence from social media.”

The polling data suggests Millennials in other ways are less frugal, in part thanks to social media driving some Millennials to feel increased social pressure to spend or keep up with others, more so than elder generations. Nearly one-quarter of Millennials feel pressure to keep up with the spending habits of their friends, the data shows, while 15% of Millennials say they are willing to spend money to make a good impression. Further, Millennials are “more likely than Boomers to report having spent more/not saved as much in a month than they wanted to,” with 56% of Millennials and 29% of Boomers saying this happens very often/somewhat often.

“Millennials consult parents and/or friends for financial advice while Boomers are more likely to consult a professional adviser,” the report finds. “Millennials are more likely to feel confident investing using a combination of online and human contact than Boomers (40% vs. 33%).”

NEXT: Aftermath of the ‘Great Recession’ 

“Millennials were in a position to learn the value of financial preparation, having grown up in the aftermath of a recession,” Sadowsky adds. “The qualities they have developed, like budgeting discipline and a realistic outlook on retirement, may well pave the way toward their financial future.”

In another positive sign, two-thirds of Millennials are saving for a down payment on a home or a related major expense, considering 29 the ideal age to become a homeowner. Revealing their longer-term outlook, almost half say they are actively concerned about running out of money in retirement, and more than half say they would be willing to retire later to maintain their desired retirement lifestyle.

Being raised mainly by the Boomers, the two generations are naturally on the same page when it comes to many financial attitudes. For example, 80% of both Boomers and Millennials suggest “saving,” as opposed to “spending,” generally makes them feel secure and, as a result, happier. The number one reason to save is “to have the confidence you can meet your financial obligations whatever happens.”

Other findings show, when presented with a variety of scenarios that included a spending option and a saving option, both Millennials and Boomers were more likely to choose the saving option over the spending option. For example, nine in 10 Boomers chose to put $100 per week toward debt/saving rather than spend $100 on a meal out, and seven in 10 Millennials made the same choice.

The full survey report is available for free download here. 

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