Can Split Deposits Lower Loan Usage?

One of the more vexing issues that Plan Sponsors have is how to limit the usage of their loan feature. We have been involved with plans that have flat out eliminated their loan feature due to serial loan takers. The employer in this case felt employees were not doing enough to plan for retirement and they didn’t want to continue to support the poor behavior.

If this is too extreme of a position, what about offering split deposits for those serial loan takers? This requires a great deal of education on behalf of the employer to get those employees focused on their long term needs. If they are continually taking loans, they probably haven’t done the necessary budgeting to live within their paycheck. Once this budgeting exercise has occurred, it might help to split their paycheck into two sources. With most employees receiving direct deposits, the employer, with the assistance of the plan advisor, can help determine what the extent of those individual loans have been.

Splitting the paycheck into an “every day expense” bank account as well as a “intermediate term high interest” account would allow that employee to build up a balance over the course of a few years. If they are taking a loan out of the plan every few years, this could eliminate the need to constantly borrow from the plan. This also is more reasonable for them to build up an emergency spending account outside of the plan to plan for that rainy day. While the split account is obviously much easier for the participant to get to, it also doesn’t come with the costs associated with taking a plan loan and isn’t subject to the ebb & flow of the market.

While this solution won’t be a fit for everyone, it is a more simplistic approach that does not require any extra effort for the plan administrator. It also has the potential to eliminate many of those small loans that are continually being distributed from your plan. Lastly, it is much simpler than adding an after-tax contribution source to your plan that while it can be used for emergency needs, it also triggers additional testing for your plan. Sometimes the best solution is just creatively messaging and structuring how someone receives their paycheck.