Coronavirus may prove to be a 'time-limited' problem for plan sponsors
Harder to reinstate retirement benefits once they've been stripped.
Employers’ matching contributions to 401(k) plans were pretty resilient during the financial crisis of 2008. In 2007, 75 percent of the roughly 1.5 million plans administered by Charles Schwab Retirement Plan services offered an employer match. By 2009, as the nadir of the crisis was being absorbed, 67 percent of sponsors offered a match.
Assuming Schwab plans were indicative of the larger 401(k) universe—some 550,000 plans—that would mean about 44,000, or 8 percent, of sponsors pulled their match during the financial crisis.
It had a real impact for the affected savers, certainly, but it was hardly a mass exodus of employer plan contributions. By 2012, the number of Schwab’s plans offering a match returned to pre-crisis levels.
In 2018, 78.8 percent of all defined contribution plans offered an employer match, according to the Plan Sponsor Council of America’s most recent annual survey. That year, 7.3 percent of plans increased their match. Only 3.8 percent suspended the match.
Some day, hopefully sooner rather than later, economists will be able to compare the recession on the horizon in 2020 to that of 2008.
When they do, they may note the weekly jobless claims the Labor Department is scheduled to release Thursday morning before the markets open. Goldman Sachs is predicting 2.25 million claims from last week alone, more than three-times the previous weekly record set nearly 40 years ago. Today, California’s Governor said there were 1 million claims in that state last week.
These are tragic days for those that have lost loved ones to the coronavirus, and terrifying for those battling the disease or already suffering its profound economic fallout. By many reputable accounts, the economy is going to get worse before it gets better. But there is also a growing consensus that the ensuing recovery could come quickly if the virus can be contained, and such a recovery could be as robust as the fallout has been devastating.
“It is possible there’s going to be a very sharp, short, I hope short, recession in the next quarter because everything is shutting down of course,” former Federal Reserve Chairman Ben Bernanke told CNBC. “If there’s not too much damage done to the workforce, to the businesses during the shutdown period, however long that may be, then we could see a fairly quick rebound.”
That prospect has guided our approach to covering the retirement market over the past two weeks.
The first question we ask every morning is “what will this mean for workplace retirement plans?” Most 401(k) investors have a time horizon that can afford the losses they are seeing in their account balances. With the power of dollar cost averaging, a lot of savers will benefit from market swoons.
Our greater fear is for those business that offer retirement plans yet can’t survive the cash crunch from the country’s induced economic coma. It’s out of deference to that fear that we have held back reporting the valuable information coming from seasoned ERISA consultants and attorneys as to the options available to plan sponsors.
In the small but (we think) important role we play in industry, that has been our Hippocratic oath—we would never want plan termination talk to agitate one sponsor to take actions to solve what Carol Buckmann, an ERISA attorney and co-founding partner of Cohen & Buckmann, says may be “a time-limited problem.”
In the coming days, Congress will pass trillions in relief to the economy designed to keep as many people employed as possible. We will continue to ask questions, listen to experts, and study ERISA’s many technicalities on plan amendments to do our part to inform industry. We will do so under this thesis: it’s a whole lot easier to strip retirement benefits than it is to reinstate them. “Sponsors should be thinking about that before they take a drastic step,” Buckmann says.
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