COVID-19: How are 401(k) Plans Coping?

In 1981, the IRS issued provisions allowing employees to fund their 401(k) accounts via payroll deductions, effectively kicking 401(k) plans into high gear. Since then, 401(k) plans have endured the stock market’s ebb and flow, soaring and plunging to varying degrees.

If history has taught us anything it’s that the market has a knack for bouncing back. This resilience is expected to prevail over the current COVID-19 crisis — which has steeply affected 401(k) plans.

To demonstrate the state of affairs among 401(k) plans, we share data supplied by the Secure Retirement Institute (SRI). We also provide insight into how large and small employers can help 401(k) participants navigate this unprecedented time.

The impact of COVID-19 on 401(k) plan sales

An April 2020 survey conducted by SRI shows that COVID-19 is expected to have a short-term impact on Defined Contribution (DC) plan sales. Note that 401(k) is the most common and popular type of DC plan.

Some conclusions from the study:

• Predictions show that DC plan sales are going to be considerably lower in the 2nd and 3rd quarters of 2020, compared with pre-COVID-19 sales forecasts
• Small plans — which represent the greatest proportion of new plan sales — will face the biggest impact
• Conversions for 23% of new plans or those under contract have been pushed out 3-4 months

As illustrated next, DC plan sales are forecast to rebound slightly in the 4th quarter; however, they still fall below pre-COVID-19 expectations.

“This forecast aligns with what we saw during the last financial crisis more than a decade ago,” said Deb Dupont, associate managing director of institutional retirement research at SRI. “According to SRI research, new plan formation declined nearly 40% between 2008 and 2010.”

COVID-19 effects on 401(k) participants

Prior to the pandemic, it was heavily reported that American workers do not have enough retirement savings. COVID-19 has made this situation worse.

Nearly 1 in 4 workers “say their confidence in their ability to retire comfortably has declined in light of the pandemic.”

An April 2020 report by Transamerica Institute states that “The negative economic effects of the pandemic are further threatening retirement savings and security.”

In addition, nearly 1 in 4 workers “say their confidence in their ability to retire comfortably has declined in light of the pandemic.” This decline in confidence increases with age.

Further, an SRI study concludes that Americans who lost their job or had their pay slashed because of COVID-19 were at least twice as likely to withdraw money from their retirement savings accounts (than those who weren’t affected). One reason is lack of emergency savings; the study results show that 1 in 4 households have less than 3 months of emergency savings.

Employers are shifting their priorities to financial wellness

With the pandemic traumatizing the United States economy and even triggering a historic stock market crash, investor fears are heightened. Although the market has largely rebounded, it remains highly volatile. Consequently, 401(k) participants may be nervous, anxious, or unsure of what to do next. Anticipating the worst, some may hastily close their 401(k) account.

Participants are in precarious financial positions due to the economic fallout of the pandemic — and plan sponsors are adjusting their priorities accordingly.

Data from SRI reveals that employers are placing significantly more importance around helping their workers through financial wellness programs. They are also offering educational materials and capabilities, as well as higher quality call center capabilities for their 401(k) participants.

Because of the crisis, “plan sponsors are doubling down on communicating to employees,” Dupont said. “A quarter of sponsors have increased plan communications with employees, and another quarter of sponsors are thinking about it. More likely, those who have already done so are larger employers with larger DC plans. More than half (52%) of smaller employers haven’t increased employee communication.”

“That recordkeepers are seeing plan sponsors increase their focus on participant services, call centers, wellness, and education, demonstrates an awareness that employees/participants need help right now,” Dupont said.

As a small employer, your financial resources may be scarcer than usual because of COVID-19. However, it’s important to recognize the vital role of financial wellness in employees’ well-being, and offer whatever resources you can.

“That recordkeepers are seeing plan sponsors increase their focus on participant services, call centers, wellness, and education, demonstrates an awareness that employees/participants need help right now”.

Financial wellness is priceless

“Financial wellness transcends retirement,” Dupont said. “It’s a holistic approach to helping employees manage their total financial lives, accommodating both short-term and longer-term needs and financial goals.”

However, about one-fifth of employers — mostly larger — currently offer financial wellness programs,” Dupont said.

“About the same say that they are considering adding programs within the next year or so. Of those, the majority say that they are doing so because of the COVID-19 crisis.”

Financial education is a central part of wellness offerings, and can include an array of topics, including:

• Retirement planning
• Insurance/benefits needs planning
• Debt management
• Higher education planning
• Credit counseling
• Budgeting

Employers now regard both debt management and financial wellness as top workplace concerns because of COVID-19. This is true for larger and smaller employers, as exhibited below.

Sources: Secure Research Institute & Retirement Leadership Forum

Guarding against 401(k) fraud is critical

Pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, employees can take up to $100,000 in hardship distributions from their qualified retirement savings account, without incurring early withdrawal penalties. This design of this benefit is for emergency financial needs.

However, on June 3, 2020, the U.S. Securities and Exchange Commission (SEC) posted an alert/bulletin, advising retirement plan investors to be aware of fraudsters targeting retirement plan benefits granted by the CARES Act.

Per the SEC, these fraudsters are unscrupulous promoters who encourage retirement plan participants to withdraw their 401(k) or traditional Individual Retirement Account (IRA) funds and purchase (often riskier) investments that are against their best interests.

By educating your 401(k) participants about related COVID-19 scams, you can help them avoid becoming victims of these schemes — which also include cybercrimes.

By educating your 401(k) participants about related COVID-19 scams, you can help them avoid becoming victims of these schemes — which also include cybercrimes.

According to SRI, federal agencies have reported greater fraudulent activities and cybercrime during the pandemic. Therefore, it’s no surprise that plan sponsors are displaying interest in stronger fraud protections and more cybersecurity for their retirement plans.

Urging calm during the storm

How can you quell the panic your 401(k) participants are experiencing during this unsettling time? One way is to underscore to them that 401(k) is a long-term strategy.

”I don’t think it’s ever been more important to heed the basics, particularly for those who aren’t looking at retirement in the very near term,” Dupont said. “Diversification, dollar cost averaging, taking the long view, and not trying to time markets [are all essential], which is probably why education and wellness are such a high priority for employers right now.”

Dupont cautioned participants against taking the CARES Act’s 401(k) withdrawals or bigger loans simply because they can.

“These provisions are in place for folks who have urgent, unexpected, and immediate financial hardships and needs at this time. The crisis has highlighted the importance of enabling emergency savings and other safety nets so people don’t have to raid their retirement savings.”