time for loan processing to evolve
Why Use ACA?
A: ACA is an automated process that provides Plan Participants access to funds through a revolving loan line, where a loan is not created until the moment that funds are actually utilized. Participants apply for an ACA Loan Line the same way they would apply for a traditional defined contribution loan. Once approved, instead of the custodian issuing a check to the Plan Participant (resulting in money immediately leaving the plan), ACA directs the requested amount to a cash account. This cash account is held within the plan, which continues earning tax-deferred income. Funds in the ACA Loan Line are available when needed and unused amounts are easily returned to core investments at any time.
With ACA, we have found that Plan Participants’ loan balances are, on average, 12% less than they would be with traditional defined contribution loans, because they borrow only the amount they need, when they need it. Plan Participants make their loan repayment directly to ACA through ACH debit or by personal check. And ACA loans provide continuity because the loans survive beyond separation from employment, eliminating deemed distribution, tax implications and penalties.
Q: How does a Plan Participant apply for a loan?
A: ACA is integrated with the recordkeeping system, so Plan Participants can apply for an ACA Loan Line online via a website. Using this approach, the recordkeeping system validates each request in relation to all plan loan rules as well as IRS regulations to ensure that the Plan Participant’s request meets all required standards. Loan approvals can also be managed manually, the way they are done today.
Q: If Plan Participant loan repayments are no longer handled through payroll deduction, how is it done?
A: Each ACA participant is provided a detailed monthly statement through e-mail or mail. The statement shows all activity associated with the ACA Loan Line, including the current outstanding balance on each loan and the minimum payment due on each loan.
Plan Participants make their loan repayment through ACH debit or by personal check. With ACA, Plan Participants have the ability to pay more than the monthly payment toward their loan(s,) and we have found that approximately 30% of loan repayments with ACA exceed the monthly minimum amount. Any extra payment made is applied to the principal of the oldest loan and will reduce the overall cost of the loan. Best of all, the Plan Sponsor doesn’t have to set up, manage, monitor, adjust or remember to close out payroll deduction at the maturity of a loan.
Q: Who keeps track of the maximum duration of the loan – the 5-year rule?
A: ACA’s patented technology amortizes each Plan Participant’s loan(s) under the ACA Loan Line based on the maximum repayment duration established at the plan level, and in accordance with the applicable laws. Plan Participants can actually set
their repayment duration to accelerate repayment.
Q: What are the ACA benefits for the Plan Participant?
A: The Plan Participant receives the following valuable benefits with ACA:
• Plan Participants can set the loan line limit amount and can borrow only what they need, when they need it. On average, we have found that the amounts of ACA loans are 25% less than traditional loans (Source: EBRI).
• Funds in the ACA Loan Line that have not been used remain invested within the plan, earning tax-deferred interest and dividends. These funds can easily be returned to core investments at any time.
• ACA’s flexible repayment process allows Plan Participants to accelerate repayment by making extra payments every month or whenever they choose. We have found that on average, 30% of ACA loan repayments are higher than the minimum required, and accelerated repayments increase the Plan Participant’s retirement balance.
• ACA provides participants that separate from their employer the ability to pay their loan over the original term which helps eliminate the risk of a deemed distribution, tax implications and penalties as well as significantly reducing the incidence of loan defaults and leakage.
Q: What are the financial implications of an ACA loan on the Plan Participant’s retirement portfolio?
A: An ACA loan is amortized at the prevailing prime rate plus a service charge. We have found that Plan Participants with an ACA loan could potentially have a greater accumulation of funds at the end of the amortization schedule, as compared with a traditional defined contribution loan. This is based on the fact that typically ACA loan participants borrow, on average, 12% less than traditional loans, have the ability to expedite payments, reinvest the unused loan amount into core funds and avoid the taxes and penalties associated with a deemed distribution if they lose employment.(Source: ACA Client Data, January – December 2010).
ACA provides participants that separate from their employer the ability to pay their loan over the original term which helps eliminate the risk of a deemed distribution, tax implications and penalties as well as significantly reducing the incidence of loan defaults and leakage.
Q: What happens to the ACA loan when a Plan Participant separates from employment (either voluntarily or involuntarily)?
A: Plan Participants who remain in their plan as “terminees continuing to participate” can continue to make payments directly and pay back their loan according to the original amortization schedule. There is no need to force total repayment of the loan in 30 to 90 days after separation from employment, as is typically the case with traditional loans.
This loan continuity or survivability feature lowers the default rate associated with traditional loans when participants separate from their employer (which research by the Pension Research Council indicates is as high as 80%).*
Q: Why ACA?
A: ACA is a complete loan processing solution. It is the most innovative defined contribution loan processing solution in the industry. By licensing ACA, Recordkeepers can eliminate the administrative burdens of managing inflexible traditional loans as well as provide a unique and sensible loan solution for retirement Plan Participants.With ACA, Plan Participants borrow only what they need, when they need and they can accelerate repayments and continue loan repayments over the original term of the loan if they separate from their employer.
Bob Wuelfing, President