COVID-19 continues to be a fluid and evolving force that has impacted all phases of society. New challenges arising related to restrictions on public gatherings and events, implementation of remote/virtual offices for employees, and school closures, to name a few, are increasing the strains on all of us. With each passing headline regarding market downturn and daily news updates on businesses closing, the continued stress that this pandemic presents to financial growth is sure to be on the minds of all individuals with retirement savings accounts.
A few items that employer-sponsored retirement plan administrators should be considering include:
Fiduciary Responsibility: The coronavirus and its current impact on many businesses (i.e., reductions in workforce, remote/virtual offices, closures, etc.) does not alleviate the fiduciary responsibility for administration of the plan. Operating the plan solely in the best interest of the participants and beneficiaries is a must. As such, focusing on ensuring that the plan’s expenses are reasonable, investing plan contributions quickly and efficiently, complying with the provisions of the plan document and regulatory mandates, and acting prudently should continue to be front and center. Now, more than ever, is the time for plan sponsors to collaborate and leverage the expertise of their service providers and ensure they are offering the right counsel.
Market Unease: One market correlation you can count on as a result of market volatility: When the markets plummet, calls to plan providers sharply increase. The coronavirus is wreaking havoc on Wall Street and is causing significant volatility within the bond and equity markets. The recent decline of investment valuation, which has nearly eradicated all of the gains from the past four to five years, is a reminder of the risks many plan participants and plan sponsors contend with in managing their portfolios. Plan sponsors should work with their service providers to provide the appropriate level of investment education to employees in this time of unrest. For defined benefit pension plans, plan sponsors should revisit their current and long-term strategy and ensure communication about investment objectives are clearly communicated to employees.
Hardships, Early Withdrawals, and Loans:With the economic downturn and potential for certain unemployment and/or furloughs, employees may be tempted to utilize funds from their retirement plans. As a result, plan sponsors may see an increase in the following activities:
Hardship distributions: a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need.
Early Withdrawals: A plan distribution before age 65 (or the plan’s normal retirement age, if earlier) may result in a taxable event to the participant. Distributions prior to the age of 59 ½ also result in penalties to the participant, in addition to payment of income tax on the distribution.
Loans: Profit-sharing, money purchase, 401(k), 403(b) and 457(b) plans may offer participant loans. A plan sponsor is not required to include loan provisions within its plan. Plan documents should be clear as to the ability for participant loans to be distributed as requests for such during this time may increase. Clear communication with employees of the loan provisions (including, but not limited to, processing fees, limits and payment of interest), and that these loans must be paid back to the borrower’s retirement account is imperative. In the event the loan is not repaid, a distributable event occurs, and payment of income tax and related penalties may be due.
SECURE Act: The SECURE Act contains a host of provisions impacting employer-sponsored retirement plans. Although many are already in effect, there are a significant number of unanswered questions remaining. Further guidance on the administration of these changes and how to incorporate them into an existing employer-sponsored retirement plans was under development by the United States Treasury Department. However, the COVID-19 situation has increased the likelihood that this clarification may be delayed as a result of potential closings at the governmental agencies.
Communication: Participants desire and expect communication from you, especially in volatile times. Strategize with your plan service providers on developing a communication channel for your participants and provide as much financial literacy as possible to them. Reassure them that you are aware of the market pressures and are working to make the best possible decisions available in the current environment. The communication may aide in calming some of the fear and anxiety present.
Citrin Cooperman remains committed to ensuring we do our part to get our employees and you through this as seamlessly as possible. We have taken the necessary steps, as have many others with the implementation of a virtual work model, to ensure the safety of our people, clients, and communities at large. However, please know that we are still available, as always, to assist and support you in these challenging times.