Qualified Plan Loans: Getting it Right

1. Qualified Plan Loans:Getting it Right September 2014

2. Agenda • Book of business statistics • Loan policy trends • Loan initiation • Loan funding • Loan refinancing • Loan reamortization • Defaulted or deemed loans • Questions?

3. Book of business statistics Wells Fargo Institutional Retirement and Trust • 431,115 participant loans outstanding across 2.8 million participants • 186,143 loans processed over last year • 67% of all plans allow loans

4. IMPORTANT CAVEAT • Wells Fargo isn’t perfect • Manual, behind-the-scenes processing is far too prevalent • We are not good at saying no • Participant loans can be an emotional part of plan administration

5. Loan policy trends • 65% of plans allow one loan at a time • 82% of plans require $1,000 loan minimum • 80% of loans use an interest rate of prime plus 1% BEST PRACTICE: Guide clients toward most common provisions to create efficiencies in processing

6. Loan initiation • Touchless loans • Participant initiated • No paper required until funding (and promissory note) sent to participant • Utilized by 85% of clients • Paperless loans • Participant initiated • Requires manual intervention by processing staff • Most common example: loans that require a review across all plans to determine maximum available and other loans outstanding

7. Loan initiation (continued) • What prevents touchless/paperless? • Spousal consent • Sponsor preference • Residential loans • Hardship loans • Why do we care? • Time to process • Opportunity for error – participant and processing team BEST PRACTICE: Utilize trained representatives and a participantguide to facilitate quicker fulfillment of paper-based loans

8. Loan funding • ACH funding • Funds automatically posted to participant bank account • Request initiated before market close can be funded next business day • Check fulfillment costs reduced – but ACH isn’t free • Challenge to authenticate participant back account. Service utilized by Wells Fargo covers about 50% of financial institutions • Approximately 20% of clients use today with more to come. Standard offering for new business clients

9. Loan funding (continued) • Checks • Only alternative for unbanked participant or with non-participating institution • Check cut day after request (assumed received before market close) but mailing time will slow receipt • Overnight mailing an option with cost paid at participant’s expense • BEST PRACTICE AND CHALLENGE: ACH funding is a win-win-win for participant, client and recordkeeper. But, it doesn’t serve all participants

10. Loan refinancing • Don’t do it!! • Manual processing: • Request must be received by contact center • Handoff to processing team • Review five year payback period • Review 50% limit • Manipulate trust funding to generate new loan while paying off old loan • Manually adjust automatically generated check to loan proceeds • Yet, we process 50 – 60 per week! BEST PRACTICE: Loan policy is your friend. Twelve month limit on generating new loans. Require loan payoff before generating new loans

11. Loan reamortization • Legally supported reasons for reamortization • Pay cycle change • Approved leave of absence • Military leave of absence • Sponsors can direct us to make exceptions • We provide the legally supported reasons to the client and advise we need their direction to move forward • Most common reason why sponsors override legally supported reasons – loan repayments started late BEST PRACTICE: Synchronization of dates between loan initiation and payroll is key to avoiding legally gray areas and unnecessary reamortizations

12. Defaulted or deemed loans • 90% of participants will repay their loan if they remain employed throughout the life of the loan HOWEVER • 86% of participants who terminate will not repay their loan

13. Defaulted or deemed loans (continued) • Automated process to manage delinquent loans • List of problem loans posted to sponsor website following quarter end • Sponsor utilizes drop down boxes to code reasons why loan should not deem • Default setting is “deem/default” • Letters are sent to participants in this category advising of impending loan offset/deem with information on how to bring the loan current • But – can’t provide loan payoff amount in letter as payoff amount may change • So – many calls to contact center

14. Defaulted or deemed loans (continued) • Sponsor engagement is a continuing problem • Some sponsors do not review list • As a result, entire group of loans will offset/deem • If participants complain, some sponsors will ask for loan to be reinstated BEST PRACTICE: Utilize automation to manage process, keeping emotion out of it CHALLENGE: Sponsors need to understand ramifications of failure to review and that “being nice” can lead to issues with compliance

15. Defaulted or deemed loans (TANGENT) • Can we help participants avoid a default? • Targeted communications “Now that you have a loan, here are things to think about”. Research shows that participants don’t understand financial implications of taking a loan • Catch up loan repayments • Loan repayments for terminated or LOA participants • LOAN INSURANCE?

16. Questions?