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Benefits group pans 401(k) loan disability mandate proposal

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Should workers who take out 401(k) plan loans automatically get credit life and disability insurance?

Diann Howland, a vice president at the American Benefits Council, recently told a national benefits policy panel that the council thinks creating a plan loan credit insurance mandate would be a bad idea.

The council represents large employers and their benefit plan administrators.

Howland talked about the idea of a plan loan credit insurance mandate in written testimony submitted to the Advisory Council on Employee Welfare and Pension Benefit Plans, a body better known as the ERISA Advisory Council.

The advisory council helps the secretary of the U.S. Labor Department meet Employee Retirement Security Act requirements.

The council has been talking about ideas for managing disability risk in an environment of individual responsibility.

Some topics that have surfaced during in-person hearings and in written testimony include the increase the number of workers seeking benefits from the Social Security Disability Insurance program, the need to educate workers and employers about the need for income protection, and concerns about whether private disability insurers’ claim review procedures are too tough, too unpredictable, or just right.

Like other witnesses, Howland talked in her testimony about the need for help with promoting disability insurance awareness and efforts to help people who become disabled handle retirement income needs.

She also talked about the 401(k) plan credit insurance mandate proposal.

Howland said the benefits council supports existing group life and group disability programs but questions how much value a 401(k) plan loan credit insurance program would provide relative to the cost of the coverage.

A plan loan credit insurance mandate bill is already pending in Congress, Howland said. 

The bill would give workers who take out plan loans the right to opt out of the credit insurance program, but it would require that the worker-borrowers be enrolled in the program automatically, Howland said.

Most workers already repay plan loans through automatic payroll deduction systems, Howland said.

“Defaults on 401(k) plan loans are generally due to job loss or job changes where the participant cannot make payments electronically… not due to death and disability,” Howland said.

Even if the credit insurance were affordable, a plan loan credit insurance program could confuse some workers, Howland said.

If some workers thought the insurance covered more than it really covered, “this product could result in people having redundant insurance coverage if they do already have disability income protection, or could result in their not selecting full disability insurance that would provide needed income maintenance and rehabilitation services,” Howland said.

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