The Coronavirus pandemic has left no industry unaffected as sustained unrest and periodic lockdowns altered the financial stability of the business. With these adverse financial effects, employees and employers alike have been forced to re-evaluate how they interact with their 401k accounts and what that ultimately means for their retirement savings.
Plan sponsors across the board are trying to navigate this new normal of changed rules, early withdrawals, and match freezes. This results in an ever-increasing need to keep employees up-to-date on plan changes and make sure they are doing due diligence to protect their accounts as much as currently possible. Read more on the most important changes your employees should know.
CARES Act Relief
Since the pandemic began, the CARES Act has been the single most influential piece of legislation relating to retirement plans in this uncertain financial landscape. Through the CARES act, the United States Government put into place temporary measures that eradicate many of the barriers and downsides of early 401(k) distributions. These changes include the following:
- Removal of the 10% early withdrawal penalty
- Repayment of income taxes are postponed until three years following withdrawal
- If plan holders are able to re-deposit the original withdrawal amount, they are waived from paying income taxes on said amount entirely
- Loan repayments are deferred until a full year after the loan was originally taken against the retirement account
Depending on the level of funding in a given account, these alterations can apply to either the full amount in the 401(k) or up to $100,000. For a more in-depth look at how CARES changed 401(k) plans.
Employee Match Suspensions
In many ways, the personal finances of employees is mirrored by the business finances of their employers. As companies employ fewer individuals amid layoffs and furloughs, employers are no longer able to turn over the same profit to which they were once accustomed. The result of this situation is that many employees are cutting 401(k) match benefits, or in some cases, suspending them entirely for at least the next year.
These cuts are something that must be directly communicated to plan participants as it significantly affects not only the current level of growth and funding in their account, but its long term trajectory. Giving employees a breakdown of how these changes will affect their account over time is the only way to allow them to come to an educated decision about how they wish to proceed with their investments.
Long-Term Implications of Lower Account Balances
Perhaps one of the most important ideas to impress upon your employees is the long-term impact of the changes caused by coronavirus related distributions.
What many individuals don’t realize is that taking out even a small amount of money now will effectively cost them thousands of dollars in future growth. Younger workers are hit particularly hard by this as not only do their 401(k) plans have the longest period to mature, but they are also the most likely to take out early withdrawals or 401(k) loans to help make ends meet during these challenging times.
Unfortunately, in many cases this is a choice that must be made. It’s always best to withdraw money than risk the potential downsides of insurmountable credit card debt, personal loans, or defaulted housing payments.
Benchmarking Helps Employers Support Employees
Under ERISA, improperly managed portfolios can cause a great deal of liability for financial advisors and companies alike. Employees have a right to know how their portfolios are being managed, what fees are being withdrawn, and whether or not their plan rates and performance is reasonable. This is ever more true as the coronavirus pandemic continues its hold on the economy and even the largest corporations are forced into substantial plan changes that affect their employees financial health.
We know how important this is, so at Benchmark My Plan, we decided to offer benchmarking service to investors at no charge to them.
Our large network of financial advisors are ready to help you benchmark your 401(k) at a moment’s notice. Reaching out to us is quick and easy. Simply give us a message or call and we can connect you with an advisor that is right for your case.
Are you ready to protect your investments? Benchmark today.