Retirement plan fiduciaries play an important role in the administration of defined contribution (DC) retirement plans. When DC plans replaced pension plans a generation ago, employees took on the burden of knowing how much to save to during their working years to generate the income they’d need in retirement. Fiduciaries ensure those plan participants are provided with the right mix of investments, plan features and education to allow that to happen.
So it comes as no surprise when plan sponsors report their top retirement plan concern during the current pandemic is, “Keeping participants on track with saving and investing.”
Top pandemic-related retirement plan concern
The CARES Act has created opportunities as well as threats to keeping people on track, as it temporarily tilts retirement plans toward current consumption for workers impacted by the coronavirus – at the expense of their future retirement security – by expanding and simplifying loan and withdrawal rules. Employers adopting the provisions need to provide guidance around their use.
Saving and investing for retirement are why employers offer retirement plans in the first place. However, it’s also complicated.
The term “participant” includes any person with a balance in the plan, from current workers to former employees, retirees, and beneficiaries. And if current workers become former employees because of staffing decisions their employer makes during this difficult period, their needs will begin to diverge from what they were.
Current employees may stop making payroll deductions to ‘save’ some money they might otherwise invest in the 401(k) plan, so a plan sponsor could address the benefits of keeping participation levels up during these difficult times. Investment education has been largely translated into using a target date or similar lifecycle fund the last few years, and there’s no reason that should change now.
Workers that lose jobs during the first half of 2020 have needs too, but their needs are different. Anyone can benefit from timely investment advice.
What these former workers really need are jobs, but until the economy picks up, this group of participants will need to rely on safety nets – including unemployment insurance, stimulus funding and any programs their (now) former employer has in place for them.
A safety net for workers
When it comes to retirement plans, safety nets are often in short supply. Some employers will ‘step up’ vesting of employer contributions in the case of an involuntary dismissal.
But there’s more they can do. They can protect retirement plan loans.
Retirement plan assets are protected in trust until they can eventually be distributed to eligible participants that separated from service with one exception: loans (ironically one of the programs being loosened by the CARES Act).
Loaned assets technically remain part of the plan when money is borrowed, with the expectation the loan will be repaid with interest to “keep the participants on track” for a secure retirement. But loan defaults are a big problem that is likely to grow much worse in the current environment.
A recent Deloitte analysis found that more than $2 trillion in potential future 401(k) account balances will be lost to loan defaults over the next 10 years – before the coronavirus crisis and the resulting economic damage – without further action by plan sponsors.
In fact, repaying loans has come to be seen as so important to future retirement plan balances that more employers are allowing extended repayment periods for separated workers; and the 2017 Tax Cuts and Jobs Act extended the amount of time a retirement loan can be rolled over until the participant’s next tax filing.
A challenge that has yet to be solved: Participants that lose their job are almost entirely unable to take advantage of these extended payment options because they lack income, even if they understand how important repaying the loan is to their financial future.
Fiduciaries can now protect retirement plan loans against default by adding loan insurance as a condition for borrowing. The insurance adds a small cost to each loan as money is borrowed and repays the outstanding loan balance if an employee loses his job.
Adding loan insurance today won’t help employees that have already lost their jobs in the current pandemic, but it could help keep more participants on track during the next downturn.
George White is Custodia Financial’s Chief Operations Officer and is part of the leadership team who champions RLE as a breakthrough solution that prevents 401(k) loan defaults before they occur. Previously, George held management positions at the Newport Group, RNC Capital and Fidelity Investments, the largest industry provider of retirement, investment and human resources solutions to the employer market.