Is Your 401k Loan Program State-of-the-Art?


PSI Newsletter and Website Header 10.2.15
By Robert C. Lawton, AIF, CRPS, President, Lawton Retirement Plan Consultants, LLC

A significant component of retirement readiness is protecting participants from themselves. Many recent studies have shown that major obstacles to employee attainment of retirement readiness include the loss of account balances due to loan defaults and hardship withdrawals. This account leakage can be reduced by a well-managed participant 401k loan program. A state-of-the-art 401k loan program has the following characteristics:

Loans are limited to safe harbor hardship withdrawal criteria

Plan loans are horrible investments. The cost is high (due to double taxation) interest payments are not deductible and penalties may apply if the loan is defaulted. Rather than allowing employees to borrow to buy a boat, snowmobile or deluxe vacation, many employers have chosen to limit participant loans to hardship withdrawal criteria. This allows employers to qualify (and essentially limit) plan loans using well accepted legal criteria. Valid hardship withdrawal requests are for funds to: prevent eviction or foreclosure, pay medical or funeral expenses, purchase or repair a primary residence and pay educational tuition.

Participants allowed to take only one 401k loan

Participants who take more than one loan have been found to default more often on their loans. Defaults can occur when a participant moves on to another job or loses a job and is unable to continue making loan payments. Some participants also take as many loans as possible if it appears that they may be facing a layoff or moving on to a different employer, as a way of advancing a distribution from the plan.

Referral to EAP for all 401k loan applicants

If safe harbor hardship withdrawal criteria are used to determine loan eligibility, it only makes sense to refer potential borrowers to the Employee Assistance Program for financial counseling. Keep in mind that the retirement plan may be the lender of last resort for these employees, many of whom aren’t able to qualify for a loan from a financial institution. Requiring financial counseling before the loan is made may help the employee avoid a hardship withdrawal, where the funds permanently leave the retirement plan.

Tighter participant loan programs are becoming common place at companies committed to retirement readiness. Plan sponsors who have successfully migrated to more stringent 401k loan programs have done so as a result of effective participant education sessions which outline the retirement readiness concept in detail.


About the Author
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton has over 30 years of retirement plan consulting and administration experience and has provided consulting services to many Fortune 500 companies including: Aon Hewitt, Apple Inc., AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Car Company, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or

About Lawton Retirement Plan Consultants, LLC
Lawton Retirement Plan Consultants, LLC is a Milwaukee, Wisconsin-based independent, objective Registered Investment Advisory (RIA) firm providing investment advisory, fiduciary compliance, employee education, vendor management and plan design services to 401(k) plan sponsors. The firm currently has contracts in place to provide consulting services on more than $400 million in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at: Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.