Re-visiting retirement plans in a post-COVID world
Employers have an opportunity to adapt their retirement plan and financial wellness strategies with these options.
The economic shutdown and subsequent passing of the CARES act as a result of the COVID-19 outbreak drastically altered the retirement outlook and created many financial challenges for some participants in company-sponsored retirement plans.
The market volatility that followed in March and April capped by nearly 30% losses in the broader equity markets paired with drastically rising unemployment rates created unexpected financial shocks for many Americans. Although utilization of the coronavirus-related distribution and loan expansion features has been much lower than expected, certain industries and regions of the country are still experiencing setbacks that continue to exacerbate financial stress in the workforce.
This extraordinary set of circumstances has provided sponsors of financial wellness programs and retirement plan benefits an unexpected window into the workforce’s financial health and wellbeing. Through this vantage point, employers gain the opportunity to adapt their strategy moving forward, provide a path for employees to get back on track, and provide tools to prevent future occurrences of financial strain such as those seen during the pandemic.
In-plan income solutions
Though employers are likely to see slow, cautious growth in the near term, the recently passed SECURE Act paved the way for plan fiduciaries to implement in-plan income solutions with an added Fiduciary Safe Harbor if certain prudent processes are followed to select and monitor the provider chosen. The recent volatility and rapid decline in financial markets did little to dissipate the plan sponsor’s interest in exploring adding income solutions to their retirement offerings.
In periods such as the recent market volatility, in-plan income solutions (typically provided through an annuity) can provide stability, downside protection and guaranteed income for those closest to retirement. However, this usually comes with an added cost, which will likely be a significant focus for any employer considering adding these strategies as well as the long-term financial stability of the insurer backing these guarantees.
Though this type of investment has been widely available for many years, it may not be a fit for every plan and or participant. As such, plan fiduciaries should consider all risks and perform the necessary due diligence before adopting an in-plan income solution.
Emergency savings and “side-car” accounts
A feature that will likely receive a higher level of focus from the retirement plan industry and legislators as the country recovers from the pandemic, but that the SECURE Act did not introduce, is the emergency savings or “side-car” account.
The concept of a “side-car” account is relatively simple and on some level exists today; however, it is plagued by a lack of clarity from a legal perspective and logistical hurdles. In effect, an employer would allow an employee, potentially through an automatic enrollment provision, to save a designated level of “after-tax” dollars before contributing any pre-tax or Roth dollars.
The idea is that true after-tax contributions would be accessible in the event of an emergency, free of any early withdrawal penalties, thus creating an emergency savings account within the participants 401(k) or 403(b) account. As distributions were taken, the account would replenish itself by shifting contributions to “after-tax” until the stated emergency savings threshold was met.
The provision looks to build upon the well-documented behavioral finance successes of automatic enrollment and auto-escalation. However, there are still many logistical hurdles, and a few legal hurdles, to clear before seeing mass adoption of auto-enrollment into retirement solutions. Plan sponsors should also be aware of the potential impact on discrimination testing, even in designated Safe Harbor plans, and should consult with their plan’s service providers before implementation.
Effective education and benefit plan spend
To best inform wellness program strategies and retirement plan design, work with your plan providers to dissect and understand how your participants reacted during these periods of financial stress and utilize data to determine next steps. With the passing of the SECURE Act, the CARES Act, and likely more retirement plan reform, plan sponsors are now armed with new, innovative solutions and tools to address the everyday financial issues employees face in the current environment.
Increasing default enrollment rates, employer contribution formulas, and QDIA/default fund re-enrollment techniques are just a few of the potentially impactful strategies that employers have in their arsenal as they assess the pandemic’s impact on the state of their organization’s retirement plan. Investment and default fund (QDIA) re-enrollment will likely receive increasing attention as committees assess the workforce’s overall asset allocation in response to volatility in late Q1.
Employers may also look to re-allocate resources and expand wellness programs to add a heightened focus on financial stability and other non-retirement related financial challenges.
Traditional education meetings focused solely on the 401(k) or 403(b) plans offered by the employer, while ignoring economic reality for many struggling employees, will not be effective in the current climate. An education campaign focused on common obstacles (i.e., student debt, consumer debt, budgeting) preventing participants from saving to adequate levels is an easy and budget-neutral way to provide much more relevant content to affected employees.
Plan sponsors should take the necessary time to carefully review the impact the global pandemic and ensuing economic uncertainty has had on the retirement health and overall financial well-being of their workforce.
They can then better utilize data to inform decisions around plan design and financial wellness programs to ensure maximum efficiency of benefits spend.
For many employees, the employer-sponsored retirement and financial wellness benefits may be the only outlet in which they receive useful and unbiased financial advice. As such, employers have an essential role to play in getting America’s workforce back on track.
