4 Ways for Sponsors to Enhance Retirement Plan Value Amid Coronavirus Impact
By: Eric Endress, CFA, AIF®, Senior Vice President – CBIZ Retirement Plan Services
While it’s always advisable for plan sponsors to maximize the value provided by their retirement programs, the coronavirus-induced economic uncertainty now plaguing the country has posed a new set of challenges. Given the tremendous impact on businesses nationwide, sponsors should consider strategies that can help strengthen retirement plans while alleviating financial burdens, and ensuring participants are aware of hardship and loan options offered by the recently passed CARES Act.
For most organizations, retirement programs represent a significant financial obligation at the moment, particularly if they are committing matching dollars to plan participants. As a result, many organizations are looking for ways to relieve expenses to protect employee wages and preserve jobs. Other organizations that haven’t been as severely impacted by the pandemic are considering ways to enhance their retirement plans. In either case, here are four keys I’d emphasize in the current circumstances:
1. Focus on plan management. I believe the most important consideration right now is focusing on plan management. That includes understanding your overall plan design and the options available to you related to matching or other types of employer contributions, along with other key plan features. For retirement plans offering safe harbor contributions, you may have the option to eliminate your safe harbor contribution requirement for the current plan year if certain conditions are met. Retirement plans including a fixed match or non-elective contribution (profit sharing) formula may be modified to suspend contributions prospectively. In all cases, there are parameters that must be met to properly make adjustments to your plan, and certain changes may impact your organization’s contribution requirement down the road. Changes must be communicated to plan participants as soon as possible since this may impact their retirement plan deferral elections.
Recognize that if you make adjustments to your plan’s overall design or elect to take advantage of any provisions offered by the CARES Act, you should fully understand when decisions must be made, what steps are being taken and how long the measures will last. Working closely with a qualified recordkeeper or third-party administrator (TPA) can help address all of these operational and plan document issues.
2. Consider participant circumstances. It’s also fundamental to focus on participants right now. Many people across the country are experiencing tremendous financial hardship due to job loss or reduced work hours. To help alleviate this unfortunate circumstance, the CARES Act offers qualified individuals newly enhanced options to take money out of their retirement accounts by increasing allowable withdrawal and loan limits and eliminating penalties for pre-retirement distributions through the end of the year. As plan sponsor, you must decide which changes are appropriate for your organization, if any, and update your plan document accordingly. Most recordkeepers are reaching out with checklists that allow sponsors to pick and choose which provisions to adopt.
Plan sponsors should be knowledgeable about the details of these support mechanisms and decide whether or not it makes sense to offer them in their plan, given all relevant factors. If you decide to take advantage of one or more of the CARES Act provisions, carefully consider your employee communication strategy. Sponsors may wish to consider a simple communication versus a robust campaign that may draw attention to the ability to withdraw money from the plan at sub-optimal market conditions. Regardless of which avenue you choose, it is important to make sure that your employees are well informed.
3. Offer diversified investments. From an investment standpoint, the biggest takeaway for sponsors right now is to offer a lineup that allows participants to be properly diversified. Because the stock market has declined significantly amid a global economic shutdown, participants could be seeing drastic asset decreases if they lack diversification — for example, having their investments too heavily invested in equities for their age or risk tolerance. It’s imperative that plan sponsors work with their respective advisors to offer a balanced investment lineup, while being careful not to implement changes that would only provide benefits during the current economic circumstances.
4. Encourage continued participation. Lastly, I think sponsors should encourage participants to continue contributing towards their retirement account despite the current market downturn. By maintaining contribution levels, or even increasing them, participants can take advantage of shares being available at significantly reduced prices and reap the benefits when the market recovers.
Understandably, if someone has lost a job or experienced a salary reduction, discontinuing retirement plan contributions can be an appealing option to make ends meet in the short term. It’s easy to look at the dollar amount being withheld, or even withdrawn, from a plan and think the impact won’t be significant because the face value isn’t high.
But because we’re talking about long-term investment vehicles designed for at least 20 years of growth in the market, thousands of dollars withheld or withdrawn now could mean hundreds of thousands of dollars less in retirement. Such a deficit can impact everything from the age at which a person retires to the standard of living they’re able to enjoy as a retiree.
Of course, some Americans might have only their retirement account to fall back on in this time of need, and little choice but to pay their bills or rent with whatever funds are available. But if participants can afford to, they should definitely maintain their plan contributions right now and potentially augment them.
Thinking beyond the moment
As discouraging as current economic circumstances may be, I believe it’s important to think beyond the moment and take a longer-term view. Much of the recent market activity has been very reactionary. On the other side of this crisis, and hopefully sooner rather than later, businesses will start to reopen and the economy will almost certainly revive at some point in the future. I encourage sponsors and participants alike to consider that before taking any significant actions related to plan parameters or retirement savings.
For more information please visit: www.cbiz.com/retirement
Reprinted with permission from the “May 8, 2020 edition of BenefitsPRO© 2020” ALM Media Properties, LLC. All rights reserved.
CBIZ Retirement Plan Services is a trade name under which certain subsidiaries of CBIZ, Inc. (NYSE Listed: CBZ) market investment advisory, investment management, third party administration, actuarial and other retirement plan services. Investment advisory and investment management services offered through CBIZ Investment Advisory Services, LLC, SEC Registered Investment Adviser. Investments, investment advisory and investment management services may also be offered through CBIZ Financial Solutions, Inc., Member FINRA, SIPC and SEC Registered Investment Adviser, dba CBIZ Retirement Plan Advisory Services. Third party administration, actuarial and other consulting services offered through CBIZ Benefits & Insurance Services, Inc.