Dive Brief:

• The Federal Reserve raised its benchmark interest rate Dec. 16 by 0.25%, and that move could eventually impact defined contribution and defined benefit retirement plans, according to a Employee Benefits News (EBN) article.
• The article points out that interest rates have been kept by artificially low by the Fed for the past nine years to help boost the nation's economic recovery from the 2008 recession.
• While most experts agree in the EBN article that the relatively small rate increase — 0.25% to 0.50% — would have a minimal impact short-term on the retirement front, they believe this is just the beginning of an attempt to get rates back up to a more realistic level.

Dive Insight:

“You hear from people that maybe this rate increase won’t be a big deal, but if they [Federal Reserve] embark on a series of increases, it could have more of an impact,” says Rich McHugh, vice president of Washington affairs for the Plan Sponsor Council of America.

Marina Edwards, a senior consultant in Towers Watson’s benefits advisory and compliance practice, told EBN that plan sponsors, typically employers, need to be aware of what will happen to 401(k) plan loans now that rates have gone up.

“Usually a plan sponsor doesn’t have to remind their recordkeeper to update [their] loans, but it wouldn’t be a bad thing for a plan sponsor to check the first or second loan issued from the plan after prime goes up to make sure the system did pick it up correctly,” she says.

Also, Amy Reynolds, a partner and U.S. defined contribution consulting leader at Mercer, told EBN that if interest rates move higher, plan sponsors will need to monitor participant reaction to changes in investment performance to encourage them not to make short-term decisions. She added that plan sponsors should also check their loan policies to determine if and when loan interest rates need to be modified (due to the long gap since the last interest rate boost) and if any action is required.