Custodia Financial Addresses Growing 401(k) Loan Default Crisis With New Retirement Loan Eraser™ Options
New options deliver more choice and flexibility to plan sponsors seeking to further protect employees from economic fallout due to COVID-19
DALLAS, June 23, 2020 – With over 40 million American workers filing for unemployment over the past three months, Custodia Financial announced today that it is enhancing its Retirement Loan EraserTM (RLE) program with two new, lower-cost coverage levels to meet the increased demand for a “safety net” protecting participants from 401(k) loan defaults, and to provide plan sponsors with more choice and flexibility.
The new options expand upon Custodia Financial’s original Full Repayment option that repays a 401(k) borrower’s entire outstanding loan principal if he or she is laid-off, becomes disabled, or dies. Going forward, depending on the needs of an organization’s workforce, plan sponsors can choose this baseline coverage level or one of two new options:
- Continuance: Six months of loan repayments following involuntary separation, providing a “bridge” while the borrower secures new employment
- Continuance + Full Repayment: Six months of loan payments followed by full repayment if the participant remains unemployed
Six months of loan payments actually provides a separated borrower with up to 12 months to get on their feet financially, as most plans offer “cure periods,” or grace periods, that extend until the last day of a calendar quarter following the calendar quarter when a missed payment was due.
These new coverage levels provide an automated “safety net” for plan participants at a significantly lower cost. While specific pricing varies by industry, the Continuance option is less than 40 percent of the cost the Full Repayment option, and the Continuance + Full Repayment option is roughly 80 percent of the cost of the Full Repayment option.
“With new legislation under the C.A.R.E.S. Act providing expanded access to retirement savings through 401(k) loans, 401(k) borrowers have never been more in need of a safety net to protect them from defaults caused by job loss,” said Tod A. Ruble, CEO of Custodia Financial. “Plan sponsors were already concerned about loan leakage, but the global pandemic and C.A.R.E.S. Act have now put an unprecedented focus on this issue. We designed these new coverage levels to give participants the protection that the research tells us they’re asking for, while also giving plan sponsors the flexibility that they want for implementation.”
401(k) Loan Defaults a Growing Threat to Retirement Security
The problem of 401(k) loan defaults was serious even before the pandemic, but due to the historic rise in unemployment, the problem is being exacerbated in the current environment. According to a 2018 study by Deloitte, 401(k) loan defaults were on a pace to erode $2.5 trillion in lost retirement savings over the next 10 years before the global pandemic and C.A.R.E.S. Act. For the average defaulting borrower, Deloitte estimated that a loan default would cost approximately $300,000 in lost retirement savings when taxes, penalties, associated cash-outs, and lost earnings are considered.
Custodia Financial developed these new coverage levels based on independent plan sponsor research conducted by Greenwald & Associates, a third-party market research firm with unique industry expertise in financial services, employee benefits, and healthcare. The research comprised in-depth conversations with plan sponsors across a broad range of industries with between $700 million and $15 billion in plan assets.
Earlier work by Greenwald had found that almost 80 percent of participants felt automated, low-cost loan insurance was appealing and almost 60 percent believed their employer should add it, with the greatest interest expressed by participants ages 25-44.
“Plan sponsors clearly see the need for automated and measurable loan protection, but desired more choice in how they implement that protection in their plans.” said Mr. Ruble. “From an employee perspective, plan participants expressed a need for a safety net, and even a willingness to increase their deferrals knowing that they could more safely access savings in a financial emergency. Beyond additional security, the vast majority of participants indicated that retirement loan insurance would reduce their financial stress levels, which have dramatically increased in the current economic crisis.”
To learn more about RLE, visit Custodia Financial’s website at www.loaneraser.com.
About Custodia Financial
Custodia Financial’s mission is to prevent loan defaults in 401(k) plans, which are coming into focus as a significant problem harming retirement readiness and financial wellness. Custodia Financial is the innovator behind Retirement Loan Eraser (RLE), an automated loan insurance program that prevents 401(k) loan defaults, protecting plan assets, and immediately improving retirement outcomes. RLE is the only solution available that helps plan sponsors prevent loan defaults by repaying the outstanding loan balance of borrowers losing their jobs, while reducing fiduciary risk. Custodia Financial’s team of retirement experts includes former senior executives from Fidelity Investments, Financial Engines, SunGard, Voya Financial, and Wells Fargo.
 “Loan leakage: How can we keep loan defaults from draining $2 trillion from America’s 401(k) accounts?”, Deloitte, October, 2018.