multiple piggy banks in a row in different colors

If American retirement security is a quilt constructed of employer-sponsored retirement plans, then the pandemic is moth larvae. Financial distress caused by the coronavirus has made it necessary for out-of-work Americans to spend their savings and shuttered companies to cut costs to survive. Workplace retirement plans have been a source of savings and a target for cost-cutting.

In an effort to ease financial suffering, Congress passed the CARES Act in late March 2020. The legislation made it easier and less costly for Americans to take distributions from qualified retirement plans. It also authorized larger distributions than plans normally allow.

So far, it seems that relatively few participants jumped to take advantage of CARES Act provisions. An early May Forbes/You.gov poll reported that, overall, 5% of respondents had taken coronavirus-related distributions (CRDs) and 4% had taken loans from their plan accounts. The percentages were higher among younger participants with 8% of 25- to 34-year-olds taking CRDs and 11% taking loans. In June, the IRS expanded eligibility for coronavirus-related distributions. But, the number of people seeking hardship distributions and loans may be higher than the number who have received distributions, if companies are having difficulty processing large numbers of requests.

Additional damage to retirement security may come from cost containment decisions taken by companies fighting to survive and recover. Advisors who participated in a National Association of Plan Advisors (NAPA) poll conducted in March, indicated that three-quarters of their small business clients were looking to lower costs by reducing, suspending, or deferring retirement plan contributions.

A poll of TPAs and recordkeepers showed similar results. About 80% of small business clients were targeting 401(k) plans as a way to cut costs. The American Society of Pension Professionals and Actuaries (ASPPA) concluded, "…based on the survey results, it's reasonable to assume that more than 200,000 small business retirement plans are potentially at risk of termination."

Strengthening American retirement security

As life returns to a new "normal," the damage done to American retirement security will need to be repaired. Advisors can help employers assess the financial health of employees and make thoughtful decisions about employee benefits and retirement plan priorities.

Companies that are able to help employees begin to rebuild financial security may find workers are more engaged and productive. Consequently, the company may recover more quickly.

Finding a balance between company finances and employee needs may be tricky, especially for companies that are suspending or terminating retirement plans or other benefits. One way for employers to let employees know they are valued is to introduce low or no-cost benefits, such as payroll deduction emergency savings accounts.

When discussing retirement plans, advisors should talk with employers about the pros and cons of alternative types of retirement plans.

Companies that terminate 401(k) plans may be able to introduce less expensive plans without violating the successor rule. John Carl of the National Association of Plan Administrators (NAPA) reported that employee stock ownership, simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE) IRA, 403(b), and 457 plans, generally, are not considered to be successor plans.

By identifying alternative solutions that sustain and improve worker morale, advisors could win additional benefits business as financial wellness programs expand.

Expanding the types of retirement plans available expands the quilt of retirement security

Ultimately, it will take all available types of retirement savings options to repair COVID-damaged retirement security in the United States. And there was a lot of room for improvement before the virus arrived. Estimates suggested that 38 million Americans working for private sector businesses did not have access to workplace retirement plans – and that doesn't include gig economy workers.

We need state-sponsored retirement savings programs. We need low and no-cost SEP, SIMPLE, and payroll deducted IRA programs. We need the whole universe of document-based 401(a) plans, including 401(k) and profit sharing plans.

The SECURE Act added new squares to the quilt of retirement security by making it easier to establish Multiple Employer Plans (MEPs), and by introducing Pooled Employer Plans (PEPs) and association plans. While these plans are important parts of the retirement security quilt, participating employers may require additional guidance. The pandemic has created challenges for MEPs, just as it has for 401(k) plans, although MEP funding issues appear to be more complex.

The SECURE Act also expanded the employer tax credit for starting a retirement plan, which could be impactful, especially in the intermediary-sold 401(k) space. For companies adding plans, the retirement plan start-up tax credit has the potential to offset most or all of the administrative costs associated with offering a plan for the first three years of operation.

At that point, it's possible participant assets in the plans will have grown enough for employers to begin passing through some, or all, hard administrative costs on to plan participants. When small businesses understand the full value of the tax credit, the closing rate on startup 401(k) proposals improves.

We need to educate employers about low and no-cost retirement plans.

COVID-19 has not changed the fact that a certain percentage of small businesses will not offer any type of plan to their employees if the plan increases employer costs. The actual percentage of business owners that fall into this category is difficult to quantify, but the 2018 Millennium Trust Small Business Retirement Survey reported that 66% of small employer participants said money was the biggest barrier to providing a workplace retirement plan, and 86% indicated they would be open to offering a plan with no direct cost to the company.

The survey also uncovered an enormous knowledge gap among smaller employers. Forty-five percent of respondents had never researched retirement plans, and only 23% had looked into options other than 401(k) plans. Fewer than one-in-four had ever considered SIMPLE or SEP or payroll deducted IRAs. It's possible those options had never been presented to them.

Today, costs are an issue that is causing some companies to close 401(k) plans. It's a decision that could affect companies' ability to attract and retain top employees, as well as their ability to sustain employee engagement, at a time when companies need to optimize productivity and deliver top-notch service.

Companies that terminate 401(k) plans may be able to introduce certain types of cost-effective plans without violating the successor rule. Advisors who educate their clients about alternative retirement plan options are providing invaluable assistance to clients when they need it most. Helping companies identify alternative solutions could help advisors win additional benefits business as financial wellness programs expand.

Consider all options available

Before the pandemic, a majority of the nearly six million small businesses (with employees) in the United States did not offer any retirement savings options to their workers. As the pandemic wends its way through our system, that number may climb higher. Indeed, larger companies also may find it difficult to sustain their retirement plans.

Employers need help navigating this complex marketplace. It's the job of professionals in the retirement services sector to help. Plan advisors have a wealth of retirement plan options available. It's time to start educating clients about them all.

The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.

Kevin Boyles is Vice President of Workplace Savings Solutions at Millennium Trust Company, where he is responsible for business development. He has nearly 20 years of experience and expertise in the retirement plan and health savings marketplace. Prior to joining Millennium Trust, Kevin was with Ascensus for 17 years.

Instant Insights /

Employers need diverse retirement plan solutions now more than ever

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