Dear Dr. Don,
I work for a large telecommunications company with a 401(k) managed by a major financial services corporation. I have taken out several loans over the years and currently have three loans outstanding. The bimonthly loan payment amounts are taken directly out of my paycheck. I'm wondering why it takes up to four business days for my loan payments to be posted. With thousands of other people in my position, who's getting this loan interest?
Generally, the money segregated from an individual's compensation to repay a loan is held by the employer or the trust for their retirement plan.
While the money held by the employer is generally not invested, employers are under strict time constraints to have the benefit allocated to the trust for the participant as soon as it's practical.
Depending on the employer and the payroll process, it can take a few days for the data to be transmitted to the plan's trustee and record-keeper. The file is processed and reviewed to ensure no errors exist. The loan repayments are funded to the trust by the employer within two days, depending on the employer's method of funding the contribution. By the end of the following day, the trustee has segregated the loan repayments and sent the payments to the participant's account, investing the money as directed. Any investment gains earned while the money is held in trust goes to the benefit of the plan participants, like you.
I suggest you stop worrying about this delay. Plan administrators are quite aware of the rules and tend to abide by them. This is especially true of large firms. The concern, however, shouldn't have any impact on loan interest expense, assuming that the interest is paid in arrears. In other words, this month's payment pays last month's interest expense, causing only a minor, if any, impact at all on your investment earnings.
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