Loan Guidelines - Prudential Financial

Loan Guidelines

City and County of San Francisco

Deferred Compensation Plan

Table of

Contents

03

04

06

07

? Introduction

? Should You Borrow

from Your SFDCP

Account?

? Important Questions to ask

Yourself Before Taking a Loan

? Who is Eligible for a Plan Loan?

? How Much can I Borrow?

? Types of Loans

? Loan Payments

08

09

11

12

? Consequences of

Missing Payments

? Pre-payments

? Unpaid or Partially Paid

Leave of Absence

? Military Leave of Absence

? Late Loan Payment Notice

? Loan Defaults

2

13

14

? If You Leave City &

County Employment

? How do I Take Out

a Loan?

Introduction

As an active employee and participant in the San Francisco Deferred Compensation

Plan (SFDCP), you may be able to access your funds through a loan from the Plan.

When you take a loan through the SFDCP, you are borrowing money from your own account and paying

yourself back with after-tax money through automatic payroll deductions. While receiving a loan can

seem like an attractive option, understand that doing so may affect the potential growth of your retirement

account. Plus, if you fail to repay the loan (or default), you may have to pay substantial income taxes on the

outstanding balance of the loan and you will not be allowed to take a loan from your account again.

To fund your loan, a portion of your investments will be cashed in (or liquidated) on your behalf. When

liquidating investments in your account, you should be aware that:

? Tapping into your retirement savings today may undermine your financial security in the future.

? You miss any potential investment gains (including compounded earnings) that you might have earned

had your money remained invested in the SFDCP.

? D

 epending on market conditions, you may be liquidating your investments at a lower share value than

their purchase price, which can negatively affect the balance of your SFDCP account.

These Loan Guidelines contain a summary of the loan program and details its advantages and disadvantages,

including the steps required to prevent your loan from defaulting if you go on a leave of absence or stop

working for the City and County of San Francisco. Consider discussing any loan decision with your family and/

or a financial advisor.

Quick Contact References

Web: I Phone: (888) SFDCP4U (888-733-2748), option 1

3

Should You Borrow from Your SFDCP Account?

While planning for unexpected expenses can be difficult, before you decide to tap into your retirement savings, make

sure you fully understand these possible consequences:

? You could be taxed twice on this money. Loan payments are deducted from your paycheck on an after-tax basis.

These are loan payments, not contributions to your account. Distributions from the Plan at retirement will be

taxable, unless you have a Roth account and you meet the 5-year holding period and age requirement.

? Your contributions may decrease. Because you now have a loan payment, you might be tempted to reduce the

amount you are contributing to the Plan, which could reduce your long-term retirement account balance.

? Loan defaults can be harmful to your financial health. If your loan is not fully repaid by the end of its term, the

outstanding balance may be treated as a deemed distribution and reported as taxable income to the IRS.

? You have no flexibility in changing the payment terms. You may not refinance your loan and payment schedules

may not be re-amortized except in limited circumstances.

? Your loan cannot be transferred. If you stop working for the City and County of San Francisco before your loan

has been paid in full, you will not be able to continue payments through payroll deduction and the balance of

your loan must be paid within 90 days.

? Loan suspensions are not automatic and repayments could substantially increase. If you go on an authorized

leave without pay, you will need to contact SFDCP Staff both before and after your leave to make sure

Prudential is notified to suspend and re-amortize your loan payments. Note that upon re-amortization, your

loan payments could substantially increase.

? Interest on the loan is not tax deductible, even if you borrow to purchase your primary residence.

? If you default on your loan, you can never take another loan again.

4

How a $3,500 Loan Could Cost you $15,000

Ken and Maria each contribute $1,500 annually to their account for 30 years. However, in the fifth year, Ken

borrows $3,500, which he must repay over the next five years.

Account Activity

Ken (with a loan)

Annual Contribution Years 1¨C4

Maria (without a loan)

$1,500/year

$1,500/year

- $3,500

- $0

$4,956

$8,456

Loan Payment Years 5¨C9

$808/year

$0

Annual Contribution Years 5¨C9

$692/year

$1,500/year

$12,818

$17,237

$1,500/year

$1,500/year

$103,566

$118,587

Loan in Year 5

Account Balance in Year 5

Account Balance in Year 9

Annual Contribution Years 10¨C30

Total Account Balance After 30 Years

After saving for 30 years, Ken has approximately $15,000 less than Maria who did not take a loan. Why? For five

years, more than half Ken¡¯s contributions went to repaying his loan. Besides missing out on savings, he also missed

out on compounding (the potential earnings on his earnings).

The Long-Term Effect of Borrowing

$120k

Maria (without a loan)

Maria $118,000

Ken (with a loan)

$100k

$80k

Ken $103,566

$60k

$40k

$20k

10 yrs

20 yrs

30 yrs

0

Assumes a 6% rate of return compounded annually and a five-year loan with a 5% interest rate. This compounding concept is hypothetical, for

illustration only and not intended to represent performance of any specific investment, which may fluctuate. No taxes are considered. Generally,

withdrawals are taxable at ordinary rates. You can lose money by investing in securities.

5

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