The novel coronavirus pandemic and its effect on the stock market caused speculation in the retirement plan industry about whether plan sponsors would react with changes to their retirement plans as they did in past market crises. There was also concern about how the market drop and subsequent reaction would affect participants’ retirement security.

PLANSPONSOR fielded a pulse survey of respondents to our 2019 Defined Contribution Survey April 7 through 10. Responses were received from 387 DC plan sponsors from a wide range of employer sizes.

Overall, one-third of respondents that offer an employer match in their defined contribution (DC) plans have discussed reducing or suspending it. Twenty-one percent have already taken action to do so, while 13% said they are likely to take action. Plan sponsors with 500 or more employees were more likely to take action than smaller plan sponsors—43% of larger plan sponsors have discussed it and 25% of smaller plan sponsors have, while 28% versus 12%, respectively, have taken action.

COVID-19 Impact on Employer Match

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Discussed Possible Employer Match Reduction/Suspension

Among Those That Discussed Possible Employer Match Reduction/Suspension:

Brian O’Keefe, PLANSPONSOR’s director of research and surveys, notes that in the 2009 DC Survey, respondents were asked whether they had reduced or suspended their match. At the time, 10% reported that they had already reduced or suspended their match. The survey was conducted in the summer of 2009, about eight to 10 months into the financial crisis. The coronavirus-related pulse survey showed that 34% of 33% already have or are likely to take action, which is roughly 10% (11.2%) and would track to the 2008 outcomes.

Suspending the employer match is a more difficult decision for safe harbor plans. In an Insights article from Cammack Retirement, Michael A. Webb, a vice president based in New York City, explains that safe harbor plans generally can suspend or reduce employer contributions if the safe harbor notice specifically stated that this action could be taken, or if the employer is operating at an economic loss in the current plan year. Safe harbor plans require a certain match formula to be used or a qualified nonelective contribution to be made in order for plan sponsors to avoid nondiscrimination testing. If these contributions are reduced or suspended, plan sponsors will be subject to this testing.

Loreen Gilbert, president of WealthWise Financial in Irvine, California, says with safe harbor 401(k) or 403(b) plans, plan sponsors must give a 30-day notice to plan participants that the match will be suspended, and the plan sponsor cannot start to suspend the match until after the 30 days. The inability to suspend match contributions quickly, coupled with the employer contribution requirements for safe harbor plans during a time when plan sponsors’ companies may be financially strapped, could lead some to reconsider their plan’s safe harbor status.

Respondents to PLANSPONSOR’s pulse survey were asked whether they have discussed and taken action on their plans' safe harbor status. One-quarter of those that indicated they sponsor safe harbor plans have discussed it, and 15% said they have taken action while 7% are likely to. Again, larger plan sponsors are more likely to have discussed it and to have taken action. Thirty-eight percent of DC plan sponsors with 500 or more employees have discussed opting out of safe harbor status and 30% have taken action. Eighteen percent of smaller plan sponsors have discussed it and only 3% have taken action.

COVID-19 Impact on Safe Harbor Status

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Discussed Safe Harbor Status

Among Those That Discussed Safe Harbor Status:

The Coronavirus Aid, Relief and Economic Security (CARES) Act created a new emergency retirement plan distribution option dubbed the “coronavirus related distribution,” or “CRD” for short. A CRD can be drawn from a DC plan or from individual retirement accounts (IRAs) in any amount up to $100,000. Under the terms of the CARES Act, the normal 10% penalty tax levied on early plan distributions by the IRS is waived. The law also doubled the amount of loans that participants can take—from $50,000 or 50% of their account balance, whichever is lower, to $100,000 or 100% of their account balance.

No doubt many retirement plan participants will need extra funds right now, but it is difficult to open up the retirement plan to support this need knowing how it may impact participants’ long-term financial security. DC plan sponsors were asked whether they will adopt the CARES Act provisions, and more than two-thirds (68%) indicated they will allow participants to take the penalty-free retirement plan distributions for COVID-19-related expenses. A smaller number (44%) reported they will increase loan limits.

Among plan sponsors with 500 or more employees, 78% said they expected to allow CRDs and 54% indicated they would increase loan limits. Sixty-two percent of plan sponsors with fewer than 500 employees said they expected to allow CRDs and 38% reported they would increase loan limits.

CARES Act Provisions

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Employers Expecting to Offer COVID-19 Withdrawals

Employers Expecting to Increase Loan Limits

Responses to PLANSPONSOR’s pulse survey support findings of other polls showing participants have mostly “stayed the course” in their investments despite the market fall and subsequent volatility caused by the pandemic. Only 4% of respondents reported 10% or more participants made investment changes. Nearly one-third said 2% up to 10% of participants did, and one-quarter said no participants made investment changes. The rest were unsure or didn’t know. Similar numbers of participants adjusted future allocations, respondents indicated.

At the time of the survey, plan sponsors had also not made changes to investments offered in their DC plans. Eighty-five percent said they were not aware of any discussions about adding or removing options based on the market downturn. Sixteen percent had discussed increasing the frequency of their investment reviews/meetings.

Recordkeepers and advisers/consultants are always a good source of insight and guidance for plan sponsors when contemplating plan design and investment performance, and they are primary sources with regard to implications of the pandemic and the CARES Act for retirement plan sponsors surveyed. Sixty-seven percent of respondents said they’ve relied on their advisers/consultants and 63% said they’ve relied on their recordkeepers. Three in 10 have turned to an ERISA attorney and 26% have relied on a third-party administrator (TPA).

For their part, recordkeepers and advisers have reacted to the crisis with additional support for plan sponsors and participants.