Q: Should loans or hardship distributions be permitted?
A: Loan provisions are offered by most 401(k) plans and may lead to fewer difficulties than hardship provisions. Despite recordkeeping and other administrative requirements, loans frequently encourage additional employee participation and appreciation by meeting financial needs that may occur prior to retirement. Since the laws governing hardship distributions are complex and violations can result in plan disqualification, an employer may not want to include a hardship provision in the plan, despite employee pressure. However, hardship provisions are common and can contribute substantially to the 401(k) plan's appeal.
Q: How can we prevent defaults on loans to participants?
A: Checking the repayment of loans with greater frequency, using a grace period and deducting loan repayments directly from payroll can lessen the possibility of default.