It’s still early in the year. It is time to break old habits and face 2021 with renewed determination. This also includes trying to get employees’ pension plans back on track. The good news is, yes it is possible and employers can help in a variety of ways.
Of all age groups, 34% have saved in their retirement plans due to the economic impact of COVID-19. Plan participants may have suspended the repayment of their CARES Act loan, discontinued their contributions to their defined contribution plan, or taken out a significant loan or payout to alleviate personal financial burdens. In January, those loan repayments came back and took a bite out of her take-home wages.
Similarly, most investors resist the temptation to tap into CARES retirement provision: Vanguard
It is time for plan sponsors to examine how they can help employees who have been hard hit financially by the pandemic.
Where to start
As unattractive as it may be, take a look back at 2020. Employers can use their development cooperation planning data to analyze participant activity and determine whether the pandemic has changed participant behavior: Has the savings rate fallen? Has there been an increase in credit? Have you seen more withdrawals during operation? Each of these indicators can help you determine possible actions.
Lower savings rates
Sponsors may encourage participants who have suspended contributions to the plan to try again. The amount saved from each payday has a significant impact on how much retirement income is available.
A key message is to encourage your members to do whatever they can: just a little helps. To back this message up, offer suggestions like slowly increasing contribution rates through 2021 and 2022 that will help them get their savings goals “up to date”. Explain the options for pre-tax savings, Roth savings (where contributions are taxed but qualified distributions are entirely tax-free), and non-Roth after-tax savings (where contributions are taxed immediately but income is taxed on distribution. )).
Some participants may have left the market entirely fearful of volatility. Do not understand the problem. Fear can prevent participants from saving even though they know they should. While plan sponsors naturally and appropriately seek to distance themselves from advice, they can certainly provide some context for market recovery so that participants can keep an eye on things and not panic about their investments. And you can remind them that timing the market is never a good idea.
If you suspended your matching contributions during the pandemic and are now starting up again, don’t be afraid to lure, start, or “restart” the match, reminding employees and participants who have suspended their contributions to that there are employer incentives for saving in the plan. While you’re at it, offer tips and tactics to help you maximize employer match.
If the participants in your plan are paying accounting fees, consider offering temporary relief by paying the cost of maintaining the plan. In response to the pandemic, many accountants granted fee reductions for loan and withdrawal transaction fees. During this fee relief window, the clerks returned these fees to an attendee’s account when they applied for credits and / or withdrawals.
Increased credit and in-service withdrawal activity
That brings us to loans and withdrawals. Plan sponsors are required to send certain communications due to actions taken by employees under the CARES Act. Loan repayments will resume and the repayment amounts may change. Also remind attendees that they can either repay the payout or spread the tax on the payout over a period of three years from the year they made the payout. This provides some level of security as it lowers the tax burden.
There are a few changes to the design of retirement plans that can help get you back on track.
- Does it make sense to reconsider the employer contribution formula to see if it’s right for 2021? For example, consider increasing the match level of participant contributions from 6% to 8% so you can encourage them to save more. As we know, the experts recommend that employees save between 12 and 15% (including employee and employer contributions) in order to build a financially healthy retirement.
- Perhaps it is time to review your eligibility requirements – do these 60- or 90-day waiting periods, for example, fit into today’s reality?
- Take a look at your low-income earners and, as an alternative to a percentage of their salary, consider a non-optional flat-dollar employer contribution that is geared towards them.
- Don’t forget the obvious: auto-enrollment and auto-buffs. But you can also consider a “retro enrollment” – reaching current employees and participants who are not saving.
Helping employees replenish their savings
Many attendees have gotten used to the extra dollars on their paychecks and may forget to top up again in 2021, although they may be able to afford it now. Reminding them of the benefits available to them is an ideal way to get them back on the plan. Finance is complex and not easy to understand for everyone. Providing financial planning services that may already be provided through the EAP will go a long way in answering your questions, as will your accountant’s resources.
Every communication is an opportunity to remind people of some important home truths – average cost, diversified savings, inflation, compound interest. It’s important to show your employees how saving on a pre-tax basis will reduce the impact on their take-home salary. And nobody can make financial decisions in a vacuum. Sponsors need to provide the big picture and take into account what else employees have to do, such as their wallets.
The overall context of the messages is that despite urgent and legitimate financial concerns, it is still important to continuously save what is possible as a step towards a safer future.
Finally, make your communication appealing. Staff don’t have much time to read this stuff. So keep things short, concise, lively and up-to-date with examples from real life at the kitchen table. Don’t always rely on words; get their attention with graphics and visuals (simple or complicated, graphics are magnets for attention). And of course, make your messages something that people can respond to.
After the turmoil of last year, we all urgently need a feeling of hope on the way to 2021. For too long, people have focused on the here and now, which is shifting under our feet practically every day. It is time to lift people’s gaze again and look to the future. Now is the perfect time for Plan Sponsors to help employees and participants redesign their financial goals and start their retirement journey.
Sandra Pappa is Principal Consultant in Buck’s wealth practice. Sandy has over 30 years of experience providing pension advice. She helps clients align their retirement program with their entire workforce and business strategy while maintaining an administratively and operationally compliant program.
Elizabeth Woodburn is director in the engagement practice at Buck, where she helps employers Communicate with employees about their benefit programs, plan designs, changes, and how to involve employees with health, wealth and career offers.