Business Wire published a news release today announcing the new strategic relationship between Securian Financial and Custodia Financial regarding Custodia’s Retirement Loan Protection (RLP) program—”a first-of-its-kind, in-plan feature that helps safeguard employees’ retirement savings by automatically protecting 401(k) loans from default when job loss, disability or death occurs.” It is a program a number of us have developing over the past decade or so, and is one of those innovative product developments efforts that takes awhile to gain traction in this market (think, for example, of things like DC lifetime income programs; 403(b) open architecture programs; individual FIAs designed for DC plans, among others, all of which first encountered resistance). Significant parts of the retirement industry can be uniquely resistant to innovative programs which are unfamiliar to the market.

There is a particular cynicism for insurance based products, like RLP, because of a commonly held belief that insurance companies and products, by their nature, are designed to use their large financial leverage to take advantage of the consumer. Some of this negative reaction, admittedly, can be soundly based in some horrid insurance sales practices, high commissions and the lack of transparency in product fees. We have been successful in minimizing much of these concerns over the years in products uniquely designed for retirement programs. It is not widely recognized, however, that the pooling of risks with others (which can only be accomplished by insurance companies or governments) is the performance of a critical societal function. Properly priced insurance, for which a reasonable risk charge is fairly levied, spreads the cost of catastrophic individual risks between many, lessening any individual’s risk into a manageable, definable exposure. In my personal view, insurance is one of the few industries where both good business and good stewardship can actually cross paths.

A few years back, I wrote a blog describing the nature of the RLP program. I invite you to take a look at it, as this news release may generate some questions for you from your clients or decision makers. One of the key misconceptions that RLP has had to deal with is the notion that a loan from a 401(k)/403(b)/457(b) plan is simply a participant “borrowing from themselves.” You’d be surprised at the number of well considered attorneys have actually raised this point with me. Take a look at the rules: as I pointed out in that past blog, a DC plan loan is legally a commercial transaction between the plan (which is actually the lender) and the participant. The plan takes a commercially reasonable lien on the participants plan account if the participant defaults. RLP provides an alternative to the exercise of that lien-it ether pays off the loan upon death or disability, or delays the imposition on the lien following involuntary termination until the participant can gather up resources to repay the loan-without the attendant taxes and penalties.

What is also often ignored is the simple fact a plan loan is an investment of the plan, to which fiduciary standards will apply. RLP also addresses this particular risk. It also has the advantage of the cost of the coverage being a cost of the loan program, and therefore of the plan, which can be structured to utilize amounts in the now-notorious forfeiture account….

Innovation still lives in this market, and often serves us all well.