NRECA Employee Benefits Weekly

401(k) Plan Loan Interest Rate Rises

Posted on Posted in Retirement Benefits

On September 26, the Federal Reserve raised its benchmark interest rate by 0.25%. In response, U.S. banks are increasing the prime interest rate to 5.25%. Effective October 1, 2018, the NRECA-sponsored 401(k) Pension Plan’s loan interest rate, which is set at 1% more than the nation’s prime interest rate, is 6.25%.

Things you and your employees should consider about loans
If your cooperative offers a 401(k) Plan loan option, your employees are eligible to take loans. You should encourage them to contact you for details on your co-op’s loan program. It’s important that participants seeking loans from their 401(k) Plan accounts understand the advantages as well as the disadvantages of these loans.

Advantages:

  • No credit check;
  • Competitive interest rate;
  • Automatic payroll deduction for repayments;
  • Loans can be taken for any reason;
  • The loan process is easy and convenient.

Disadvantages:

  • If investment returns are higher than the interest rate participants are paying on their loans, they’ve lost the opportunity of higher returns on the money they’ve taken out;
  • Loan repayments and interest will be deducted from participants’ paychecks, lowering their take-home pay;
  • If participants stop contributing to the 401(k) Plan due to the demands of making a loan repayment, your co-op’s matching contributions (if part of the plan) also will stop;
  • With the exception of military leave, participants are expected to continue repaying their 401(k) loan during any other kind of leave, including disability. If they don’t repay the loan back before retirement, it will be considered a taxable distribution from their account.

When considering a loan, participants should be encouraged to seek guidance from their personal financial or tax advisor. They also can contact NRECA’s Personal Investment & Retirement Consulting (PIRC) team at 866.673.2299, option 6, or at pirc@nreca.coop.

Model and request loans online
To view the loan interest rate or request a loan, participants can log in to the Employee Benefits website at cooperative.com > My Benefits > My Retirement. Click on Loans, then select Model & Request a Loan.

For questions, contact the Member Contact Center at 866.673.2299 or contactcenter@nreca.coop.

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