With so many American workers under strain during this historic period of grief, loss, and change, the resilience of employers and plan sponsors has never been more critical. In fact, the COVID-19 pandemic has the potential to wreak havoc on the country’s retirement prospects, so focusing on employee financial wellness is more timely than ever.
As of the end of May, napa-net.org reported that 11.8 percent of employers stopped or decreased their retirement plan matching contributions. At the same time, widespread concerns about health and financial challenges due to the COVID-19 pandemic have caused three in 10 Americans to raid their retirement savings.[1]
Further, CNBC reported that more than 40 percent of Americans are worried about not having enough money saved during the economic crisis, with more than one-quarter citing stress related to paying monthly bills such as utilities, rent, or a mortgage.[2]
More than half of businesses responding to the U.S. Census Bureau Small Business Pulse Survey from April 26 to June 27, 2020, reported significant negative effects from COVID-19, with about a third saying they expect more than six months will pass before their businesses feel a sense of normalcy again.
There is no question about it: The going has gotten tough. And as employers look for opportunities to help employees and plan participants feel more prepared in an uncertain world, many are asking, what’s next?
“It’s game time for plan sponsors and employers,” says CAPTRUST Defined Contribution Practice Leader Jennifer Doss. “2020 has brought its share of both personal and professional challenges, and it’s time to think about what actions your plan can make to regain momentum for your employees’ financial wellness in the months ahead.”
Doss says it’s important to have a solid understanding of what is available to support employees. “And with recent legislation and innovations, there are more tools than ever before to promote financial wellness.”
Legislative Biggies
The latest in an explosion of new legislation is still hot off the press, with 53 percent of small businesses saying that the $2 trillion stimulus package rolled out under the Coronavirus Aid, Relief, and Economic Security (CARES) Act was a good first step to address the challenges they are facing.[3]
Signed into law by President Trump on March 27, 2020, the CARES Act included a $1.46 billion fund to provide grants and low-interest loans for small businesses through the Small Business Administration to mitigate layoffs and support payroll. In addition, employers get a payroll tax deferral (with the ability to stagger repayment of those taxes in the future). It also temporarily altered the rules for retirement plans in response to the coronavirus outbreak.
The new law lets employers decide whether or not to allow up to $100,000 in coronavirus-related distributions (CRDs) without the 10 percent penalty on early distributions for those that meet certain qualifications. “This allows those affected by the virus to access their retirement accounts and avoid having to take a loan or hardship withdrawal,” says Doss, adding that individuals can repay distributions within a three-year period as rollovers back into the retirement plans or individual retirement accounts (IRAs).
Another big piece of the legislation expands participants’ access to their accounts through current and new loans taken before September 27, 2020. The law doubles the maximum loan amount that a participant experiencing a COVID-19 event can potentially take and provides a suspension period for existing loan repayments. Plan sponsors should keep in mind that the new loan rules are optional and that they are not required to make them available.
Today, nearly two-thirds of plans have adopted the CARES Act’s provisions allowing participants to take CRDs, and 37 percent have increased plan loan amounts under this new legislation.[4]
But Doss wants to remind plan sponsors not to let all the focus on the temporary relief from CARES Act distract them from the bigger legislative picture.
“To some extent, plan sponsors forgot about the SECURE Act for the first half of 2020,” she says, and advises that, as they come up for air, employers and plan sponsors should be aware of its mandatory provisions and start to evaluate any optional provisions that may be applicable to their plans.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed late last year, will also help increase opportunities for employers to support their plan participants.
Through 30 different provisions, the SECURE Act provides for expanded access to retirement benefits for long-term part-time employees, special distribution options for new parents, and delays the start age for required minimum distributions.
And that’s not all. The SECURE Act packs even more heavy hitters supporting retirement savings. “It is by far the biggest and most impactful piece of legislation for the retirement industry that we’ve seen since the Pension Protection Act of 2006,” says CAPTRUST Senior Director of Retirement Services Phyllis Klein.
According to Klein, the SECURE Act’s new safe harbor for annuity provider selection “is going to alleviate a lot of plan sponsor anxiety about evaluating insurers issuing these contracts.” The provision provides a liability shield for plans that obtain certain representations indicating the insurer providing the lifetime income product is financially capable of satisfying its obligations.
For instance, according to SHRM.org, the legislation will protect employers from liability if they select an annuity provider that, among other requirements, for the preceding seven years has been licensed by the state insurance commissioner to offer guaranteed retirement income contracts; has filed audited financial statements in accordance with state laws; and has maintained reserves that satisfy all the statutory requirements of all states where the annuity provider does business.
“This part of the SECURE Act legislation is designed to reduce barriers to plan sponsors considering in-plan annuities and make it easier for fiduciaries to meet the requirements that are imposed,” Klein explains.
In addition to making it easier for plan sponsors to offer guaranteed lifetime income solutions to participants, Klein explains that the SECURE Act contains a provision requiring annual lifetime income disclosures to be provided to participants showing how their balances would translate into monthly income streams at retirement.
The new legislation requires benefit statements to include an estimate of monthly income a participant may receive in retirement based on various types of annuities. These calculations will use Department of Labor calculation criteria that still needs to be established.
“The hope is that this disclosure provision will bring more participant attention to things like lifetime income and moving from accumulation to decumulation,” says Klein, adding that “seeing what kind of income their retirement savings can generate could do a lot to nudge people to make greater contributions to their retirement savings.”
“At the very least, the SECURE Act will create more conversations about retirement income and about annuities within defined contribution plans,” says Klein. “The idea here is really to have participants start to think about how their savings can support them in retirement.”
With all these new retirement plan options on the table, plan sponsors should consider what features would be most helpful for their plans’ participants and see to it that any amendments to the plan for the SECURE Act and the CARES Act are timely executed.
Create Confidence
Even before the coronavirus pandemic erupted, employer-provided financial wellness programs were an area of focus for many plan sponsors.
“The crisis has made people of all salary levels more uncertain about their futures,” says Doss. “They have questions about their retirement savings, and some are facing difficult, stressful financial situations with no easy solutions. Everybody’s situation is very different than it was a few months ago.”
A recent survey shows a third of employees are reporting new financial and health concerns due to the COVID-19 pandemic and its economic impact, and many are feeling more anxious and worried than ever before.
In fact, an overwhelming majority (92 percent) reported some form of anxiety, and only 39 percent felt they were adequately coping with the stress they are under. The survey also revealed that employees struggling with financial issues and health issues are among the least engaged. This group was also found to be the most likely to have to work past the age of 70, to be more prone to anxiety and depression, and to have increased issues with absenteeism.[5]
“Financial well-being, health, and stress are interconnected, and what we are seeing is that those issues compound,” says Doss. “Fewer people feel in control of their financial futures, and employers are facing a completely different set of well-being challenges this year.”
She recommends finding ways to create confidence for your workforce. For example, “Now is a good time to consider getting a financial wellness program going. It’s not too late. Participants are going to be grappling with the impact of COVID-19 on their finances for a long time,” says Doss.
Doss recommends employers and plan sponsors think about what resources their people need most and target those areas. From addressing high levels of debt to cash flow issues, unexpected expenses, caring for aging parents, retirement planning, or other financial stressors coming out of the pandemic, employers can help participants feel more in control of their situations with personalized offerings.
A Tailored Offering
Some people are making the difficult decision to direct funds from retirement savings into more urgent needs, while others are looking ahead at how they can make up for lost ground, Doss explains. “That’s why general guidance and education only go so far and really makes the case for personal interaction and advice tailored to the participant’s situation,” says Doss.
“In my experience, the one thing that drives results the most is one-on-one meetings because they’re completely customized, and the time spent is really driven by the participant,” says Doss. “You’ve got to meet them where they are and address their most top-of-mind concerns to help avoid distraction.”
Doss adds that time spent with a financial advisor can help plan participants with critical information, like knowing how to react to a volatile market, if their retirement plan is still on track, or how they can pay back the withdrawal they took from their retirement account during the coronavirus outbreak.
Personalized advice can also help participants understand what their sources of income will be once they are no longer working and help them project how much they’re going to need down the road, how to get there, and then how to draw down those assets.
Personalized advice can be delivered in several ways. For example, recent developments in technology have made managed accounts more accessible and cost-effective, says Klein.
“Because they are tailored to the participant’s finances, goals, and risk tolerance, managed accounts can bolster participant confidence by delivering investments informed by the risks they could face before and after retirement,” says Klein. “Managed accounts deliver a high level of customization but do not require a high level of participant involvement, if any.”
This is because managed account providers leverage various data points, such as what is available in the recordkeeping or payroll system. This could include age, gender, savings rate, income, marital status, and dependents.
Klein advises employers and plan sponsors to get input from plan participants by asking them what they need—then invest in the areas that will have the most impact.
“The last few months have put many organizations’ systems and processes to the test, and not everyone was prepared,” says Doss. “Plan sponsors need to take a breath, reflect, and assess the plan,” she says. “Look at how the plan did—how well it met the needs of participants during this time—and think about where you need to make changes.”
“No doubt, it’s almost time to play offense,” says Doss. “When the initial shock of COVID-19 wears off, it’s going to be critical that employers and plan sponsors are ready and willing to hit the ground running.”
[1] Berger, Sarah, “3 in 10 Americans Withdrew Money From Retirement Savings Amid the Coronavirus Pandemic – and the Majority Spent It On Groceries,” MagnifyMoney, 2020
[2] Fox, Michelle, “Coronavirus Crisis Is Causing Financial Stress for Nearly 9 in 10 Americans,” CNBC, 2020
[3] “Small Business Owners Report Devastating Impacts of COVID-19,” Small Business Majority, 2020
[4] “How Have Plan Sponsors and Participants Responded to COVID-19?” NAPA, 2020
[5] “Prioritizing Employee Wellbeing,” Willis Towers Watson, 2020
