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HUB International 2021 Outlook

Employee Retirement

 

Transforming Uncertainty into Opportunity

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The Unexpected Consequences of COVID-19

Retirement plan sponsors need to manage increasing compliance and fiduciary risks while addressing the financial wellbeing of plan participants.

The fallout from the coronavirus pandemic is likely to preoccupy plan sponsors throughout 2021.

Over 33 million Americans were either laid off or furloughed in April 2020, as the economy shut down in a bid to manage the fast-moving coronavirus pandemic. During this time, nearly 14% of Americans wiped out their emergency savings. Another 11% had to borrow to cover everyday expenses.

“Now is not the time to be without skilled retirement plan guidance, given the risks that plan sponsors can face for getting it wrong.”

The events of 2020 have created a host of issues that retirement plan sponsors will be dealing with well into 2021. Not the least is assessing how the COVID-19 disruption affected retirement plan participation – and its impact on discrimination testing. But the decimation of savings in general and increased borrowing raises a more concerning, longer-term issue. Especially after this year’s shocks to the system, employee retirement readiness is floundering.

Plan sponsors, focused on managing disruption from COVID-19, must also respond to two major pieces of legislation: the CARES Act, designed to bolster Americans from the initial economic shock of the pandemic, and the SECURE Act, retirement plan regulations that were passed in late 2019.

Now is not the time to be without skilled retirement plan guidance, given the risks that plan sponsors can face for getting it wrong. Your plan advisor should help you stay ahead of timely issues – so your administrative systems track with changing plan provisions, critical compliance requirements are met, and your fiduciary responsibilities are demonstrably and consistently upheld.

Among the issues that should most concern retirement plan sponsors in 2021:

“Plan participation and retirement readiness are best approached as parts of a strategic, multi-faceted financial wellness program.”

1. Fallout from the pandemic on employee behavior with your plan

Employers should closely monitor how employee participation in their retirement plan has changed in comparison to participation in the past decade. Gaining insight into your employee behaviors will give you a better idea of the most important impacts of waning participation – and compliance issues that might arise for fiduciaries of the plan.

For example, if your company eliminated or delayed its 401(k) match, did this prompt employees to stop participating in the plan? (That could guide how you proceed in reinstating it.) Another concern is the extent to which employees acted on the CARES Act provisions to raise the limit on 401(k) loans and allow for penalty-free early withdrawals on IRAs or 401(k)s (in 2020 only). Either move, while helpful to mitigate financial stress in the short-term, can potentially have a dramatic negative impact on the individual’s long-term success in the plan, including tax problems and financial difficulties.

Retirement plan issues are just one component of a larger ongoing problem affecting employees today. For many Americans, financial stress is a fact of life that the pandemic and circumstances around it have only aggravated. Plan participation and retirement readiness are best approached as parts of a strategic, multi-faceted financial wellness program. Employers can’t ignore the larger picture, especially now. Your plan advisor should be able to recommend resources to help address the need.

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“As a general rule, if 20% or more of a qualified retirement plan’s participants are let go during the course of the plan year, a partial plan termination may be triggered. ”

2. Partial plan terminations – an immediate risk

Layoffs and furloughs may have been an economic necessity in 2020, but many employers may not realize the implications reach beyond their payroll costs. As a general rule, if 20% or more of a qualified retirement plan’s participants are let go during the course of the plan year, a partial plan termination may be triggered. This means that affected employees must be immediately 100% vested to the extent that they are funded.

This gives rise to issues ranging from record keeping to plan documentation. One of the most complicated aspects is how employers define “furlough”: Is it a complete termination? Is a job waiting at some point, and when? That’s an important determination for vesting for the required distribution. Ideally, plan advisors have been providing guidance on this issue through the year – from the final count to the final plan costs, including the fully vested benefits of affected employees that aren’t already vested. The consequences of not recognizing the partial plan termination has been triggered can be severe, such as the administrative burden of reinstating forfeited balances.

“Plan sponsors also need to make sure their administrative systems are up to the tracking needs presented by new plan provisions.”

3. Compliance concerns and record-keeping issues grow

Plan sponsors can also expect to see their responsibilities become more complicated as a function of the CARES Act and the SECURE Act, both in how they influence employee behaviors with their plans and in what’s required to manage new plan provisions.

For example, if a significant segment of employees took advantage of 401(k) loans under the CARES Act, it will be important to anticipate the administrative impact on the plan going forward. One unanswered question is how hardship cases will be handled, when loans can’t be paid back. Discrimination testing will also be critical to show the highly compensated weren’t favored in receiving the loans; employers must be prepared to deal with the ramifications (potentially including a return of funds) if it’s found that the loans were not given impartially.

Plan sponsors also need to make sure their administrative systems are up to the tracking needs presented by new plan provisions. Under the SECURE Act, long-term, part-time employees are eligible for retirement plans, effective in 2024, but employers need to make sure now that their internal record-keeping systems can track them. In fact, it’s important to audit any plan changes or provisions that can create a loophole in record keeping. These are the types of issues that your plan advisors should make sure don’t get lost in the midst of other obligations.

There’s a reason, though, that the term “new normal” was coined – it’s all starting to feel more familiar, possibly making conditions easier to respond to in 2021.

“Given the liability exposure (evidenced this year by about a fivefold increase in 401(k) lawsuits), the pressure is on plan sponsors to refocus in 2021.”

4. Fiduciary responsibilities can’t be neglected

Employers had a lot to distract them in 2020. How well many upheld their fiduciary responsibility to review their retirement plans’ investments and measure portfolio performance may have fallen off as a result. Given the liability exposure (evidenced this year by about a fivefold increase in 401(k) lawsuits), the pressure is on plan sponsors to refocus in 2021.

In addition to assessing the plan’s investment performance and fees, plan sponsors should also review participant complaints or concerns about investment services, and confirm whether participants had uninterrupted access to investment tools and resources. Periodic formal, in-depth reviews of the plan’s outside experts should also be conducted.

Understanding trends that influence how retirement investment accounts are managed is increasingly important to monitoring overall retirement plan performance. A growing trend is to include an adviser managed account tool within the 401(k) that uses the individual plan member’s data, financial situation and asset allocation preferences as the basis for his or her portfolio management. Tools like these can significantly improve retirement readiness for employees.

Readiness for 2021’s challenges

Many of the distractions that were with us in 2020 will still have an influence over companies, their management, their retirement plan and their people in 2021. There’s a reason, though, that the term “new normal” was coined – it’s all starting to feel more familiar, possibly making conditions easier to respond to in 2021. The better prepared employers are for what’s ahead, the better their people will be positioned for retirement.

HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate.

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