When drafting new 401(k) plans, I always recommend allowing for a loan provision. I know there are quite a few plan providers who don’t want any provisions that allow “leakage” of retirement assets, but I believe that when times are tough, plan participants should have access through a loan that they can repay.
As far as loans go, I only want one loan outstanding at a time. If participants want a loan, fine, but let’s just let have one crack at it. A 401(k) plan shouldn’t turn into a payday loan type operation. However, the real reason that I’m against multiple loans is the difficulty in recordkeeping. Recordkeeping multiple plan loans can be an absolute headache especially when it comes to recordkeeping repayments. I’ve seen too many situations where errors in recordkeeping let one or more loans go into default and becoming a deemed distribution or a prohibited transaction when not deal with correctly.
If you ask for trouble, you’ll get it and I think that plan sponsors offering multiple plan loans are asking for it by allowing multiple loans that can only lead to a headache.
