multiple piggy banks in a row in different colors (Photo: Shutterstock)

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If American retirement security is a quilt constructed ofemployer-sponsored retirement plans, then the pandemic is mothlarvae. Financial distress caused by the coronavirus has made itnecessary for out-of-work Americans to spend their savings andshuttered companies to cut costs to survive. Workplace retirementplans have been a source of savings and a target forcost-cutting.

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In an effort to ease financial suffering, Congress passed theCARES Act in late March 2020. The legislation made it easier andless costly for Americans to take distributions from qualifiedretirement plans. It also authorized larger distributions thanplans normally allow.

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So far, it seems that relatively few participants jumped to takeadvantage of CARES Act provisions. An early May Forbes/You.gov pollreported that, overall, 5% of respondents had takencoronavirus-related distributions (CRDs) and 4% had taken loansfrom their plan accounts. The percentages were higher among youngerparticipants with 8% of 25- to 34-year-olds taking CRDs and 11%taking loans. In June, the IRS expanded eligibility forcoronavirus-related distributions. But, the number of peopleseeking hardship distributions and loans may be higher than thenumber who have received distributions, if companies are havingdifficulty processing large numbers of requests.

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Additional damage to retirement security may come from costcontainment decisions taken by companies fighting to survive andrecover. Advisors who participated in a National Association ofPlan Advisors (NAPA) poll conducted in March, indicated thatthree-quarters of their small business clients were looking tolower costs by reducing, suspending, or deferring retirement plancontributions.

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A poll of TPAs and recordkeepers showed similar results. About80% of small business clients were targeting 401(k) plans as a wayto cut costs. The American Society of Pension Professionals andActuaries (ASPPA) concluded, "…based on the survey results, it'sreasonable to assume that more than 200,000 small businessretirement plans are potentially at risk of termination."

Strengthening American retirement security

As life returns to a new "normal," the damage done to Americanretirement security will need to be repaired. Advisors can helpemployers assess the financial health of employees and makethoughtful decisions about employee benefits and retirement planpriorities.

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Companies that are able to help employees begin to rebuildfinancial security may find workers are more engaged andproductive. Consequently, the company may recover more quickly.

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Finding a balance between company finances and employee needsmay be tricky, especially for companies that are suspending orterminating retirement plans or other benefits. One way foremployers to let employees know they are valued is to introduce lowor no-cost benefits, such as payroll deduction emergency savingsaccounts.

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

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Companies that terminate 401(k) plans may be able to introduceless expensive plans without violating the successor rule. JohnCarl 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 besuccessor plans.

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By identifying alternative solutions that sustain and improveworker morale, advisors could win additional benefits business asfinancial wellness programs expand.

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

Ultimately, it will take all available types of retirementsavings options to repair COVID-damaged retirement security in theUnited States. And there was a lot of room for improvement beforethe virus arrived. Estimates suggested that 38 million Americansworking for private sector businesses did not have access toworkplace retirement plans – and that doesn't include gig economyworkers.

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

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

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

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

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

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COVID-19 has not changed the fact that a certain percentage ofsmall businesses will not offer any type of plan to their employeesif the plan increases employer costs. The actual percentage ofbusiness owners that fall into this category is difficult toquantify, but the 2018 Millennium Trust Small Business RetirementSurvey reported that 66% of small employer participants said moneywas the biggest barrier to providing a workplace retirement plan,and 86% indicated they would be open to offering a plan with nodirect cost to the company.

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

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

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Companies that terminate 401(k) plans may be able to introducecertain types of cost-effective plans without violating thesuccessor rule. Advisors who educate their clients aboutalternative retirement plan options are providing invaluableassistance to clients when they need it most. Helping companiesidentify alternative solutions could help advisors win additionalbenefits business as financial wellness programs expand.

Consider all options available

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

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Employers need help navigating this complex marketplace. It'sthe 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.

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The information presented is not investment, legal, tax orcompliance advice. Millennium Trust Company performs the duties ofa directed custodian, and as such does not offer or sellinvestments or provide investment, legal, or tax advice.


Kevin Boyles is Vice President of WorkplaceSavings Solutions at Millennium Trust Company, where he isresponsible for business development. He has nearly 20 years ofexperience and expertise in the retirement plan and health savingsmarketplace. Prior to joining Millennium Trust, Kevin was withAscensus for 17 years.

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