COVID-19, Employers and Retirement Risks

April 21, 2020

COVID-19 has changed the operations of most American businesses, with many shifting employees to work at home, and some temporarily shutting down. Employers are concerned about keeping employees safe and protecting them financially. Human resources professionals are faced with many issues related to managing reduced financial budgets, getting the work done, keeping people safe, handling remote work, and remaining available to help employees address financial and benefits concerns.

Some of the questions about retirement that employees are asking include “How will this impact my retirement?”, “Can I use my retirement funds to help me pay my bills now?”, “Will these circumstances change the timing for when I can afford to retire?”.

A new Society of Actuaries report, Impact of COVID-19 on Retirement Risks, provides an overview of many of the issues related to retirement risks. This article is based on that report and provides information for employers to consider.

What employers may wish to do now – allow easier access to retirement savings

Under the CARES Act, employers are permitted to amend their plans to give greater access to retirement savings to be used for other purposes. As of April 14, a Plan Sponsor Council of America survey indicated that nearly half (48%) of respondents were deciding what to do about these potential plan changes. More larger plans (those with over 5,000 participants) than smaller plans (those with under 200 participants) are adopting CARES Act provisions.

COVID-19-Related Hardship Distributions

Under the CARES Act, if the plan is amended to provide for this, defined contribution retirement plans can make COVID-19-related distributions (CRDs) in 2020 to qualified participants of up to $100,000. These distributions aren’t subject to the 10% early withdrawal penalty tax but are subject to ordinary income taxes. The participant has up to three years from the distribution date to repay these distributions and to pay Federal income taxes on the amounts not paid back into the plan. According to the PSCA survey, nearly 70% of large organizations are allowing these distributions, compared to 20% of smaller organizations.

COVID-19 Loans

The CARES Act gives plan sponsors the option for 180 days starting on March 27, 2020 to increase retirement plan loan limits to the lesser of $100,000 or 100 percent of the participant’s vested account balance. This is double the existing loan limit.

In addition to the increase in loan limits, plan sponsors can extend loan payments due between March 27, 2020, and December 31, 2020 by one year. Payments will need to be recalculated to reflect any additional interest accrued during this extended repayment period. Participants are eligible to take a CRD or loan if they can self-certify that they meet one of several COVID-19 criteria.

One-third of the PSCA survey respondents are amending their plans for these loan provisions. That includes 47% of large organizations and 17% of small organizations.

But a word of caution is in order. Employees who tap retirement savings now to help pay their bills may be asking for trouble later on. Employees should be encouraged to be very careful before they use plan funds for short term expenses because they could miss out on any market rebounds as well as reducing their retirement security. Deciding whether to allow the enhanced distribution leads to a trade-off between business needs, short-term employee financial needs and the long-term best interest of employees.

Employees are in different situations and many are financially fragile

The Society of Actuaries survey, Financial Perspectives on Aging and Retirement Across the Generations, has shown that some employees are not able to pay for an unexpected expense of $1,000 and live paycheck-to-paycheck. Others have a sufficient emergency fund and have accumulated significant retirement savings but they are still wondering what to do now and how to move forward. The Society of Actuaries research report Financial Fragility Across the Generations looks at the situation of such financially fragile Americans and reinforces the need for an emergency fund and encourages a rethinking of how much money should be in such a fund.

Employers who offer financial wellness programs, including financial coaching, will be looking to their wellness providers to offer support to employees in different situations. Those employers without a financial wellness program will need to decide how much help they want to provide and what they can do to help employees link to outside resources.

Employers can be a valuable source of help

For many Americans, their employer-sponsored employee benefit plans and any financial wellness offerings are their primary sources of third-party financial information. And their employer-sponsored 401(k) and similar plans may represent their primary retirement savings, and in some cases, their primary savings for all purposes. The COVID-19 virus and related economic developments create challenges for many employees with which employers and their benefits plans can often help.

A first step is let employees know what resources are available through employee benefit plans and other employer-sponsored programs.

Many employees will want to revisit their financial strategies to see if they are doing the right thing for their personal situation. Some employers offer tools and resources like financial coaching to help employees do that. Some of the financial strategies that employees may want to review include:

Dealing with immediate needs
Figuring out how to reduce or defer expenses
Keeping debt under control
Revisiting long-term investment strategies
Checking if retirement plans are on track
Using Health Savings Accounts (HSAs) appropriately

Employers will want to decide what they can do to help and confirm with their vendors what they are providing to employees. Employee Assistance Programs (EAPs) can be a good source of help on non-financial challenges.

Employees reaching retirement must make longer term decisions

Some employees will be retiring or considering retiring in the middle of COVID-19. COVID-19 serves to reinforce the importance of Social Security for the financial security of retirees. However, employees should carefully evaluate Social Security claiming strategies. Unfortunately, many people claim Social Security early without understanding what it can cost them in the long run. The Society of Actuaries report, Spend Safely in Retirement, discusses the value of late claiming and offers ideas for strategies that help employees use their retirement resources wisely.

Conclusion

COVID-19 creates many challenges for employers, employees and in particular for human resources professionals. Dealing with retirement plan issues may be far down the list, but employees are concerned about their financial situation and future. Employers can offer help in the short-term and perspectives on the longer-term and they will probably want to review their plan designs and administration to see how well they work out in responding to these unprecedented challenges.

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