Qualified Plan Loans:Getting it Right

September 2014

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Agenda

Book of business statistics Loan policy trends Loan initiation Loan funding Loan refinancing Loan reamortization Defaulted or deemed loans Questions?

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Book of business statistics

Wells Fargo Institutional Retirement and Trust

431,115 participant loans outstanding across 2.8 million participants

186,143 loans processed over last year 67% of all plans allow loans

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IMPORTANT CAVEAT

Wells Fargo isn’t perfect Manual, behind-the-scenes processing is far too

prevalent We are not good at saying no Participant loans can be an emotional part of plan

administration

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Loan policy trends

65% of plans allow one loan at a time 82% of plans require $1,000 loan minimum 80% of loans use an interest rate of prime plus 1%

BEST PRACTICE: Guide clients toward most common provisions to create efficiencies in processing

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Loan initiation

Touchless loans Participant initiated No paper required until funding (and promissory note) sent

to participant Utilized by 85% of clients

Paperless loans Participant initiated Requires manual intervention by processing staff Most common example: loans that require a review across all

plans to determine maximum available and other loans outstanding

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Loan initiation (continued)

What prevents touchless/paperless? Spousal consent Sponsor preference Residential loans Hardship loans

Why do we care? Time to process Opportunity for error – participant and processing team

BEST PRACTICE: Utilize trained representatives and a participant guide to facilitate quicker fulfillment of paper-based loans

Loan funding

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ACH funding Funds automatically posted to participant bank account

Request initiated before market close can be funded next business day

Check fulfillment costs reduced – but ACH isn’t free

Challenge to authenticate participant back account. Service utilized by Wells Fargo covers about 50% of financial institutions

Approximately 20% of clients use today with more to come. Standard offering for new business clients

Loan funding (continued)

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Checks Only alternative for unbanked participant or with non-

participating institution

Check cut day after request (assumed received before market close) but mailing time will slow receipt

Overnight mailing an option with cost paid at participant’s expense

BEST PRACTICE AND CHALLENGE: ACH funding is a win-win-win for participant, client and recordkeeper. But, it doesn’t serve all participants

Loan refinancing

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Don’t do it!!

Manual processing: Request must be received by contact center

Handoff to processing team Review five year payback period

Review 50% limit

Manipulate trust funding to generate new loan while paying off old loan

Manually adjust automatically generated check to loan proceeds

Yet, we process 50 – 60 per week!

BEST PRACTICE: Loan policy is your friend. Twelve month limit on generating new loans. Require loan payoff before generating new loans

Loan reamortization

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Legally supported reasons for reamortization Pay cycle change

Approved leave of absence

Military leave of absence

Sponsors can direct us to make exceptions We provide the legally supported reasons to the client and

advise we need their direction to move forward

Most common reason why sponsors override legally supported reasons – loan repayments started late

BEST PRACTICE: Synchronization of dates between loan initiation and payroll is key to avoiding legally gray areas and unnecessary reamortizations

Defaulted or deemed loans

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90% of participants will repay their loan if they remain employed throughout the life of the loan

HOWEVER

86% of participants who terminate will not repay their loan

Defaulted or deemed loans (continued)

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Automated process to manage delinquent loans List of problem loans posted to sponsor website following

quarter end

Sponsor utilizes drop down boxes to code reasons why loan should not deem

Default setting is “deem/default”

Letters are sent to participants in this category advising of impending loan offset/deem with information on how to bring the loan current But – can’t provide loan payoff amount in letter as payoff

amount may change

So – many calls to contact center

Defaulted or deemed loans (continued)

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Sponsor engagement is a continuing problem Some sponsors do not review list

As a result, entire group of loans will offset/deem

If participants complain, some sponsors will ask for loan to be reinstated

BEST PRACTICE: Utilize automation to manage process, keeping emotion out of it

CHALLENGE: Sponsors need to understand ramifications of failure to review and that “being nice” can lead to issues with compliance

Defaulted or deemed loans (TANGENT)

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Can we help participants avoid a default? Targeted communications “Now that you have a loan, here

are things to think about”. Research shows that participants don’t understand financial implications of taking a loan

Catch up loan repayments

Loan repayments for terminated or LOA participants

LOAN INSURANCE?

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Questions?