Beyond 2020: Reshaping your DC plan

So far, 2020 has brought a global pandemic, economic crisis, civil unrest, and recordbreaking wildfire and hurricane seasons. Employers are balancing the desire to protect their employees with the need to cut costs, often through workforce actions ranging from suspension of retirement plan contributions to pay cuts to furloughs and layoffs. Employees are juggling essential roles or working from home, often alongside e-learning children. The resulting financial stress from the pandemic alone is amplified in the midst of these other events.

Retirement savings are at risk. More than a quarter of US employers have downsized their workforce through layoffs and/or furloughs. An estimated 10% of employers have suspended or delayed retirement plan contributions.  These actions reduce employee and employer dollars going into the retirement system.

Some employees are tapping into retirement savings to cover short term needs. Legislation passed earlier this year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, provided employees additional flexibility to access their retirement savings without certain negative tax implications. Employees taking advantage of these coronavirus related loans or distributions may see longer term impact on retirement preparedness.

While younger employees have time to get their retirement savings back on track, mid and late career employees may find they need to defer retirement for a year or two or adjust their standard of living in retirement. A 45 year-old saving 7% of his $50,000 salary, and receiving a 6% employer match, may need to defer retirement two years if he stops saving for one year and also withdraws $25,000 to cover short-term expenses.

We are already seeing a shift in retirement, with employees retiring later and transitioning to retirement more gradually. COVID may further this trend. A recent Voya survey found that more than half of employed Americans are planning to work in retirement. Employees are looking to improve their financial security in retirement and create a buffer to protect against market volatility.

The pandemic has reshaped “normal” in so many ways. Creating a “new better” applies to retirement plans as well. Employers should take action now to better understand the long-term impact of 2020 events on employees’ retirement readiness and broader financial security. The right plan design, employee support, and structure can pave the way to future success.

Understand the impacts. Going into 2021, it will be important for employers to understand the long-term impact on employees’ financial wellbeing and the potential cost of delayed retirements. Though there are some benefits to an older workforce, an employees’ inability to retire at an appropriate age can lead to higher employer cost and limit advancement opportunities for younger employees, potentially creating more turnover.

Understanding and quantifying these impacts is a first step for employers who want to be in position to drive the best outcomes for both their employees and their business strategy.

Revisit plan design. Now is a great time to take a fresh look at the retirement program. An ideal plan design encourages adequate retirement savings, provides a minimum level of security for employees who can’t afford to save, supports a diverse workforce, and promotes the ability to retire at ages viable for both workers and the company while staying affordable for employers.

Employers who suspended the company match will want to create a plan for reinstatement, communicating to employees in advance so they have time to adjust their contributions. All employers should monitor changes in employee savings and investing behaviors and remind employees to restart or increase their retirement contributions as soon as they are able.

Address financial wellbeing. Focusing on broader financial wellbeing can improve employee financial security, create resiliency to future events, and drive better retirement outcomes. Employers should take steps to identify their employees’ unique financial challenges to make sure their financial wellbeing program is aligned. A range of options exists for addressing most topics, and in some cases, can be integrated with the retirement program.

For example, employees who have emergency savings are better able to weather economic downturns. About 10% of large employers provide access to emergency savings, but recent activity suggests that number could increase. Earned wage access programs, another way to support short term financial security, are also growing.

Consider lifetime income. The SECURE Act requires employers to begin disclosing the amount of lifetime income employees can expect from their 401(k) balances beginning in September 2021. As employees are already looking for sources of guaranteed income in retirement, the new disclosures will likely drive more demand for lifetime income options in defined contribution (DC) plans. Employers can begin evaluating options now and taking steps to help their employees manage income through retirement.

Reduce cost and risk, and weigh your options. DC plan litigation is on the rise – fee related class action lawsuits filed are already triple what we saw during all of 2019. Employers should take immediate action to ensure they have a strong governance structure that is being followed diligently. Check that investment and recordkeeping fees are appropriate. Consider shifting risk and responsibility to experts through delegation of investments or joining a pooled employer plan (PEP), a new type of 401(k) created under the SECURE Act. Joining a PEP can dramatically lower fees and costs for both employees and employers, and relieve employers of many of the fiduciary duties they have today operating their own 401(k) plans. This approach allows employers to spend less time on DC plan management and more time on their business and more strategic endeavors.

Managing through the pandemic and resulting economic crisis has highlighted opportunities for improvement in the current system. Employers can take advantage of lessons learned from 2020 events to improve outcomes in the future.

Melissa Elbert is a partner at Aon Retirement Solutions.