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The COVID-19 crisis has created a situation where tens of millions of American workers are in danger of seeing their retirement savings depleted and has led to extreme disruption in daily life, financial markets, and the economy—especially employment.
As of May 28, more than 40 million Americans filed claims for unemployment benefits in the previous 10 weeks. The deadly combination of levels of unemployment not seen since the Great Depression, a significant market downturn, and the ongoing problem of severe friction in plan-to-plan portability foretells serious implications for retirement outcomes.
Companies forced to lay off employees in recent weeks could be vulnerable to liability since, as fiduciaries, they have a duty to act in the best interests of participants. Years from now, terminated employees could choose to sue when they discover that their retirement income was adversely affected by an automatic rollover or automatic cash-out.
Consider the circumstances
Americans laid-off due to the pandemic may have difficulty finding new employment until lockdowns and other restrictions subside, and the economic recovery begins. For now, their retirement savings may remain in their former employers' defined contribution plans, unless cashed out to pay for emergency or basic living expenses. Recent market losses will likely have caused 401(k) account balances for many active and terminated participants to decrease.
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