1. Know the Facts Before Taking a Retirement Plan Loan.
[Note to financial professional: Please refer to slide.]
Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by Capital Group which receives fees for managing, distributing and/or servicing its investments.
Investments are not FDIC- insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Know the Facts Before Taking a Retirement Plan Loan.
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2. As a financial professional, I’m always encouraging my clients to plan ahead. But no matter how much we try to anticipate the future, we sometimes find ourselves facing unexpected expenses. Cars break down, water heaters wear out, and roofs leak.
Ideally, you’ll have funds set aside to cover such expenses. But if you don’t, where do you turn?
Maybe you’ve considered taking a loan from your retirement plan account. Have any of you ever thought about doing that? [Note to financial professional: Attempt to get feedback from the audience.]
Well, if you’ve wanted to learn more about retirement plan loans, you’re not alone. A lot of people ask whether taking out a loan is a good idea. I’m here today to help you better understand this plan feature so you can make an informed decision.
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3. As of the end of 2015, 82.8% of retirement plans now have a loan provision.*
Loans have become a common retirement plan feature. In fact, a recent industry survey found that 82.8% of plans now have a loan provision.* Your employer’s retirement plan through American Funds is among those that offer loans.
You may have noticed more people talking about them, from friends and family to personal finance gurus on television and radio programs.
There are many reasons that plan loans are becoming more commonplace, such as the simplicity and speed by which you can access additional cash. But there are also some potential concerns you should consider prior to taking out one, which we will discuss today.
* PSCA’s 59th Annual Survey of Profit Sharing and 401(k) Plans.
* PSCA’s 59th Annual Survey of Profit Sharing and 401(k) Plans.
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4. Insert infographic and accompanying hedge from Page 2 of brochure.
How Do Retirement Plan Loans Work?
Borrow up to 50% of your vested account balance (maximum $50,000)
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REPAY YOUR LOAN WITHIN
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When you take out a retirement plan loan, you’re in the unique position of being both the lender and the lendee — you’re actually borrowing from yourself.
Let’s take a look at the basic concept. [Note to financial professional: Refer to slide.]
Typically, you’re able to borrow up to 50% of your vested account balance (up to $50,000). You’ll then have regular loan payments deducted from your paycheck, which will go back into your retirement plan account. You’ll have to pay interest on the principal amount of the loan too, but that interest will be deposited into your account along with the principal repayment.
You normally have up to five years to repay the loan. [Note to financial professional: If the plan offers loans to purchase a principal residence, you can mention this as a possible exception to the five-year rule.]
Now let’s go over some of the pros and cons of taking out a plan loan.
Pay your account back, with interest, via regular deductions from your paycheck
Please note that some retirement plans may have a required minimum loan amount or allow for mortgage loans, which can be repaid over more than five years.
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5. Pros: It’s easy. You pay yourself back.
Your interest and fees are reasonable.
First, the pros.
For starters, it’s easy. You don’t have to worry about completing lots of paperwork or getting credit approval. [Note to financial professional: Tell participants what must be done to initiate a loan request. Check with the plan sponsor if you are unsure.]
The other advantage is, you pay yourself back. When you take a loan from your plan, your repayments — both the principal (that’s the actual amount of the loan) and the interest — are deducted from your paycheck and paid back directly into your retirement plan account. None of the loan repayment goes to a bank or anyone else.
Speaking of interest: The rate for a loan from your retirement plan is currently x% [Note to financial professional: Check with plan sponsor.]. The interest rate you pay on your loan is required to be a reasonable one — usually prime plus 1% or 2%. Additionally, the loan fees are often lower than those you might incur through a bank loan.
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6. Cons: If you leave your employer, the balance may become due.
Fees can cut into your savings.
You may end up saving less.
There may be an opportunity cost of lost earnings.
Now the cons. While there are upsides to taking a loan from your retirement plan, there are also several drawbacks:
First, there’s a possibility that if you change jobs the loan balance will become due. When you leave your employer, you may have to repay the amount that you still owe within a short period of time or else the loan will be considered a taxable distribution from your plan. When you consider that today’s workers change jobs as many as 10 times during their careers, you’ll want to weigh your decision to take a loan carefully. Ask yourself: Can you afford to repay your loan balance in full if you leave your company?
If you don’t have the money to pay off your balance, you’ll owe federal income taxes on the outstanding loan amount, plus a 10% federal tax penalty for early withdrawals if you’re under age 55 at the time you leave. And this doesn’t include any state income taxes you may have to pay.
Next is the issue of fees. Make sure you carefully read your plan’s loan specifications to identify the fees charged to set up and maintain your loan. [Note to financial professional: Inform participants of the loan setup fees and loan maintenance fees that they would incur if they take a loan.] Just like any other fees, these can impact your retirement savings.
Another long-term disadvantage is that those who take out a loan often end up reducing the amount of their regular contribution to the plan because of the extra loan repayment they now have to pay. For example, someone who was saving $200 per paycheck may suddenly reduce that amount to $150 when faced with an additional $50 loan repayment. If you reduce the amount you’re saving, you may be slowing down your progress.
Finally, there could be lost opportunity. When you’re borrowing money from your account, you’re missing out on earnings that money could have accrued for you during the period of the loan repayment.
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7. Is it a financial emergency?
Before You Decide, Consider …
Is it a financial emergency?
While taking a loan from your account is a personal decision, it’s important to try to be objective. Be sure to weigh all your options carefully, because a loan may have an impact on your retirement plan account over time.
There are a few things you may want to ask yourself before you proceed with taking out a loan.
First of all, what is the money for? [Note to financial professional: Refer to question on slide.]
As a general rule, if you’re thinking of taking a loan for a short-term discretionary expense, such as going on a vacation, you may want to think twice. Remember, the money you save in your retirement plan is supposed to be for retirement, not for a trip to Tahiti.
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8. Is it a financial emergency?
Before You Decide, Consider …
Is it a financial emergency?
Have I considered other financial resources?
Next, … [Note to financial professional: Refer to new question on slide.]
If you have the time to save up the money to cover the expense, that would be ideal. But if you don’t have that luxury, then consider other resources. Maybe you have another account you can draw on. Sometimes it pays to be creative.
It is important to consider all other resources before deciding to borrow from your retirement plan account.
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9. Is it a financial emergency?
Before You Decide, Consider …
Is it a financial emergency?
Have I considered other financial resources?
Am I confident I can repay the loan?
Also, before you decide to take a loan, ask yourself this question: [Note to financial professional: Refer to question on slide.]
Before you take a loan, you'll need to factor loan repayments into your budget.
If you don't feel reasonably confident that you can make all of the repayments, taking a loan may not be the right decision for you.
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10. Is it a financial emergency?
Before You Decide, Consider …
Is it a financial emergency?
Have I considered other financial resources?
Am I confident I can repay the loan?
Am I comfortable with the loan provisions of my plan?
Another thing to consider is … [Note to financial professional: Refer to question on slide.]
Be aware of the loan fees, interest rate and repayment terms. You should be able to find these details on your retirement plan website, or in either the plan’s Summary Plan Description (SPD) or a separate loan policy, available from your employer.
The more information you have, the better able you’ll be to make an intelligent decision.
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11. Is it a financial emergency?
Before You Decide, Consider …
Is it a financial emergency?
Have I considered other financial resources?
Am I confident I can repay the loan?
Am I comfortable with the loan provisions of my plan?
Can I take out a loan and still keep my retirement savings on track?
Finally, one of the most important questions to consider is … [Note to financial professional: Refer to question on slide.]
It may be that after asking yourself all these questions you’ve decided that a retirement plan loan is right for you. That’s fine — but consider doing all you can to continue your progress toward meeting your retirement goals.
Going forward, keep these two things in mind:
First, If you're currently making a regular contribution to your retirement plan, do your best not to decrease that amount as a result of your loan repayment.
Second, focus on trying to prepare for future financial emergencies by setting aside money that is separate from that in your retirement plan account. Save that for its true purpose: covering your expenses in retirement.
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12. “An investment in knowledge pays the best interest.”
Benjamin Franklin
The main thing I’d like each of you to take away from today’s meeting is this — seek out the information you need to make an educated decision. [Note to financial professional: Read quote on slide.]
Anytime you’re making decisions that could impact your future, you should be thoughtful. Ask questions, consider your personal circumstances and then make an informed choice.
If you feel you need more information on taking a loan, feel free to give me a call or send me an . [Note to financial professional: Provide your contact information to participants and let them know the best way to reach you.] I’d be glad to help you walk through your choices.
Whatever you do, don’t lose sight of your retirement goals. Your employer’s retirement plan is one of the best tools you have to help you prepare financially for retirement. By keeping this long-term perspective in mind, you can make better decisions today.
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13. American Funds Is a Key Provider for Your Retirement Plan
Since 1931, American Funds has invested with a long-term focus and attention to risk.
Nearly half of the 56 million investor accounts in the American Funds are retirement accounts.
Your employer has selected a key provider for your retirement plan — American Funds from Capital Group.
There are 56 million investor accounts in the American Funds, and nearly half of those are retirement accounts.
Since 1931, American Funds has invested with a long-term focus and attention to risk — both are key to effective retirement planning.
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14. Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
[Note to financial professional: Refer to slide. Give your audience time to read important disclosure.]
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15. [Note to financial professional: Thank audience for attending and let them know how to get in touch with you if they need further assistance.]
© 2017 American Funds Distributors, Inc.