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REFILE-Texas firm sees 401(k) loan gold on Capitol Hill
By Jessica Toonkel
NEW YORK Aug 10 (Reuters) - Tod Ruble is trying to sell retirement plan insurance that employers say they do not want and their employees may not need.
But the Dallas-based veteran commercial real estate investor is not letting that stop him. Since late 2010, he has started up a company, Custodia Financial, and spent more than $1 million pushing for legislation that would allow companies to automatically enroll employees who borrow from their 401(k) plans in insurance that could cost hundreds of dollars a year.
The idea of the Retirement Savings Security Act is to protect employees who borrow from their 401(k) retirement funds - and their beneficiaries - in the event that they die or become disabled, Ruble said. Custodia plans to add unemployment to that list.
The bill already has strong backing. It is sponsored by Texas Representative Peter Sessions, the National Republican Congressional Committee chairman, and has bi-partisan support from four co-sponsors: Representatives Bruce Braley and Ruben Hinojosa, both Democrats; and Representative Tom Latham and Representative Patrick Tiberi, both Republicans.
Employers and 401(k) providers say the bill is simply a solution in search of a problem and would just be an added expense for employees. They cite U.S. Department of Labor data that shows in 2009 only $670 million of the $51.73 billion in 401(k) loans was in default. Custodia says the problem is actually much bigger because that number may not include all defaults.
"They have a product that they can't sell so they want Congress to step in," said Ed Ferrigno, vice president, Washington affairs, for the Plan Sponsor Council of America, a trade group that represents employers offering 401(k) plans.
Ruble said he started Custodia because he saw 401(k) loan default as "a real issue that needed addressing."
He said companies have told him that they want to offer 401(k) loan insurance but won't do so until Congress passes legislation that says doing so will not put them in violation of their fiduciary duties. He would not say which companies he has spoken with.
Ruble has a lot riding on the bill.
Custodia stands to make millions - even billions - of dollars if the measure passes and not just from collecting premiums. The firm has acquired the patents to the technology and implementation behind the 401(k) loan insurance it wants to offer, according to documents reviewed by Reuters. Other insurers would have to pay Custodia to use the patented process.
INSURING ONE'S OWN MONEY
Most 401(k) plans - under which employees save on a tax-deferred basis for retirement, often with additional contributions from their companies - allow individuals to borrow up to half of the vested balance in their account or $50,000, whichever is less. The amount repaid, plus the interest, is put back into the individual's retirement savings account.
As of the end of 2011, 26.6 percent of employees had borrowed against their 401(k) assets, with an average loan balance of $7,923, according to Aon Hewitt, a provider of human resources consultancy services.
If the bill is passed, employees could end up paying hundreds of dollars to insure money they owe themselves, said Judy Miller, director of retirement policy at the American Society of Pension Professionals and Actuaries. However, they would have the ability to opt out of the program, according to the draft bill.
Some employees might not realize they are being enrolled in and paying for the insurance, said Diann Howland, vice president, legislative affairs, at the American Benefits Council, which represents primarily Fortune 500 companies. "This is not good for plans or plan participants," she said.
And Bob Hunter, director of insurance for the Consumer Federation of America, a consumer watchdog, said that buying the insurance would be "a very bad idea" for employees to start with. He is particularly concerned about the idea of auto-enrolling employees.
"For Congress to make it automatic is a totally absurd way to buy insurance and it is totally inappropriate," said Hunter, who was the Federal Insurance Administrator under President Jimmy Carter. "The default should be no insurance, not insurance."
Custodia's chief financial officer, Kevin Smart, estimates that on a $10,000 loan paid off over five years, the company's insurance - with coverage for disability, death and unemployment - would cost about $1,048.
According to Aon Hewitt, fewer than 3 percent of employed borrowers defaulted on a 401(k) loan in 2011, compared with a 63 percent default rate among borrowers who lost their jobs.
Employees generally have five years to repay a loan. But for employees who leave their companies, the balance of the loan is usually due within 60 days and income tax must be paid on the outstanding balance, plus an early withdrawal penalty if the borrower is under age 59-1/2.
For an individual who borrows $10,000 but loses his or her job after paying back half the total and cannot pay off the balance right away, taxes and penalties would amount to about $2,000, assuming a 10 percent penalty, 25 percent federal income tax rate and 5 percent state tax rate.
But as more employers are allowing ex-employees to set up payment programs beyond the 60-day time frame - a relatively new development according to Patti Bjork, director of retirement research at Aon Hewitt - more borrowers may be able to avoid default.
Custodia's Ruble said extra time won't help people who can't pay because they're unemployed or disabled and can't work.
MAKE OR BREAK LEGISLATION
Ruble said he started Custodia in 2010 for the sole purpose of passing the Retirement Savings Security Act so employers feel comfortable offering and auto-enrolling borrowers.
"Employers would like to have certain legal certainties before they do this," he said. "They need a nudge."
He likens it to the time before the Pension Protection Act of 2006, which among other things said that employers who automatically enroll employees in their 401(k) plans would not be in violation of their fiduciary duties. Before the act, 19 percent of plans had auto-enroll features. Now 57 percent do.
In addition to the $1 million for lobbying Custodia has spent to get the bill passed, Ruble himself since 2010 has made more than $43,000 in campaign and other donations to several members of Congress, including Tiberi, one of the bill's co-sponsors.
Sessions and the other co-sponsors, have not received donations, according to the Federal Election Commission website. Sessions was not available for comment. Tiberi said in an emailed statement that providing an option for people to insure themselves against further setbacks is "sound policy."
For Custodia, the payoff of passing the legislation goes beyond insurance premiums. Through its affiliate Pentech LLC, the firm owns five patents that cover every step in offering, calculating, administering and collecting 401(k) loan insurance, according to documents reviewed by Reuters. Competitors would have to spend significant time developing their own process or license it from Custodia.
Retirement plan trade groups are concerned that despite their push against the bill, it may pass as an add-on to bigger, last-minute legislation at the end of the year.
"We are worried that this may slip through and we won't have time to stop it," said Howland.
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