Administration May 4, 2020

Pandemic May Stall Implementation of Certain DC Plan Decisions

The effects of the COVID-19 pandemic have plan sponsors contemplating what to do about scheduled re-enrollments, the (RFP) process and fund mapping during recordkeeper conversions.

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Some defined contribution (DC) plan sponsors that had a re-enrollment scheduled this year have deferred it to later months, Mike Volo, senior partner at Cammack Retirement, tells PLANSPONSOR.

But, not knowing how long the current market climate will last, many plan sponsors are questioning whether and when they should move forward with such plan decisions. The effects of the COVID-19 pandemic on the market and employment arrangements have plan sponsors contemplating what to do not only about scheduled re-enrollments, but also about the request for proposals (RFP) process and moving forward with recordkeeper conversions during which some investments may have to be mapped to new ones.

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“In most cases, yes, they should move forward,” Volo says. “But, there is a caveat.” If an employer is planning a re-enrollment process for July 1, for example, the process can continue, he says, but it’s important for employers to add an effective communication plan with an early decision window, along with virtual meetings for education. “That provides participants the opportunity to understand what changes are occurring, and then also allows them to determine their own investment mapping, versus being automatically enrolled,” he explains.

It wouldn’t be surprising if plan sponsors still deferred their re-enrollment process, however. Some may be focused on their employees’ needs first, says Chris Anast, senior vice president and senior retirement strategist with the Retirement Strategy Group at American Funds. Even though he encourages plan sponsors to stick to their long-term plan when implementing changes, postponing could be advantageous when sponsors consider how a re-enrollment could affect participants’ investments. “In this environment, it may be beneficial to just move that off, since there’s so much attention being paid to [the effect on] plans now considering the active market,” he adds.

The RFP process may also need to stall. In a survey for members of the Society of Professional Asset Managers and Recordkeepers (SPARK), conducted in conjunction with the SPARK Institute and DCIIA, RFPs were found to be affected in the wake of the pandemic. Peg Knox, chief operating officer (COO) at DCIIA explains that with most of the employee population working from home, plan sponsors were concerned about managing paperwork, document signatures, payroll and staffing issues, and the lack of “necessary technology infrastructure,” the survey found.

Already scheduled recordkeeper conversions must continue, however. When it comes to fund mapping, Anast says, generally, nothing would change. “You still have an overarching strategy for why you’re making the change and why you’re mapping [to new funds]. Nothing really changes with those ultimate goals,” he stresses. He notes, however, that any investment changes made by participants will change to which funds they will be mapped during the conversion.

Many plan sponsors are pushing back on plan design changes during this time because of market swings, while others are doing so to focus on employees, Knox says. In feedback from employers, Knox notes most were more concerned with helping employees with their current finances than with changing plan design. “There’s this focus on keeping the company afloat and keeping employees employed,” she states.

Still, while studies have found few employers so far are reducing or suspending employer contributions, it’s likely that more will. This may be the most significant plan design change plan sponsors implement this year. Volo reiterates that it’s essential for plan sponsors to carefully consider and provide communication to participants about the change.

He notes that sometimes priorities change, and they especially have during the COVID-19 pandemic.

Opinions May 4, 2020

Consider Near- and Long-Term Issues Before Implementing CARES Act Provisions

Plan sponsors are urged to consider factors other than the short-term financial needs of their employees before adopting new loan or distribution provisions.

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More than 30 million Americans are out of work because of social distancing measures slowing the spread of the COVID-19 pandemic. One White House economic adviser recently told reporters that the unemployment rate may reach levels last seen during the Great Depression before the pandemic ends. In response, Congress and President Donald Trump passed several new laws intended to provide relief to workers, support for small businesses and other employers, and equipment and funds for hospitals and health care professionals.

The largest of these measures—the Coronavirus Aid, Relief and Economic Security (CARES) Act—not only provided $2 trillion in various types of relief, but also included several temporary retirement plan provisions providing emergency access to retirement savings for plan participants affected by the pandemic. These new options are not mandatory—each plan sponsor must decide for itself whether to adopt the new loan or distribution provisions based on its own situation and the needs of its own workforce. There are a number of factors plan sponsors should consider in addition to the short-term financial needs of their employees, including whether participants are likely to default on loans in the future, which may result in new tax penalties, and the likelihood that defaulted loans and distributions will permanently destroy hard-earned retirement savings.

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What’s New with Coronavirus-Related Distributions and Loans?

The new distribution and loan provisions are separate from any existing loan or hardship provisions a plan may have. As the following chart explains, plans may decide to allow eligible participants to take a distribution of as much as $100,000, or take a new loan of up to $100,000, or both. Plan sponsors need to decide what they want to do, and then begin working with service providers, especially their recordkeepers, to decide how to implement their decisions prudently.

Participant eligibility is based on one of two factors: either the participant, spouse or a dependent is diagnosed with COVID-19, or the participant experiences adverse financial consequences due to COVID-19, which include being quarantined, furloughed, laid off or missing work due to child care responsibilities. As there has been little interpretive guidance from the IRS or the Department of Labor (DOL) as of this writing, service providers and plans must make some judgment calls about how to proceed when the statute is not clear (such as whether to allow self-certification for loan eligibility). Fortunately, recognizing the disruptive effects of the pandemic, these enforcement agencies generally have indicated that they will provide latitude for compliance efforts made in good faith.

Key Considerations for Plan Sponsors

Unsurprisingly, given the rapid pace of these changes and the need for clarifying guidance on certain legal issues from IRS and DOL, plan sponsors have a wide range of opinions on the new options. As a recent survey by PLANSPONSOR indicates, plans are not uniformly adopting all of these provisions. 

Balancing Emergency Liquidity with Preserving Retirement Benefits

Therefore, if adopting the new loan provisions, plan sponsors are well-advised to take loan default risks into account and consider ways to mitigate these risks. Here are some things to consider:

  • What if the participant is laid off after taking the loan? For many plans, separation from employment results in the need to repay any outstanding loans. Plan sponsors should consider changing their loan policy to allow for continuation of loan repayment after separation of employment. They may also want to explore other options to build a “safety net” for their most financially at-risk employees and participants to protect them from loan defaults following layoffs, such as including automated loan insurance in a loan program. These options may be available from recordkeepers already.
  • What if the participant has already been laid off? Many plans don’t allow participants who are no longer employees to originate loans—if plan sponsors intend the new coronavirus loans to be available to workers who have already been laid off, they need to take this into account in designing the new loan program and to discuss whether this is possible with their recordkeepers.
  • Can the participant “roll-in” a CRD? Not all plans allows participants to “roll-in” money from another plan or individual retirement account (IRA)—if a plan adopts CRDs but doesn’t allow participants to return money taken as a distribution, it makes it less likely any unused money will be preserved for retirement.
  • Talk to your recordkeeper right away! What plan sponsors are legally allowed to do under these new provisions, what they decide they want to do, and what their recordkeepers can do may not be the same. Sponsors should talk to their recordkeeper right away about its processes for adopting these provisions and ensure they understand how that process will work for their plan. Some recordkeepers may already have sent a notice that they will apply some or all of these provisions to plans unless employers object—what’s known as a negative consent process. Others require affirmative consent from their clients before they will proceed. In either case, plan sponsors need to make timely, considered decisions about these provisions.

Whatever sponsors decide after taking into account the short- and long-term effects on the plan and its participants, be aware that it will be necessary to amend plan documents. Fortunately, the CARES Act permits retroactive plan amendments until 2022—this provides needed flexibility to immediately make and adjust arrangements with service providers and participants to resolve issues before finalizing any plan amendments. It should be noted that this retroactive amendment provision does not apply to non-CARES Act plan changes sponsors may be considering. Eliminating matching contributions or other reductions in benefits likely requires prospective plan amendments and advance notice to participants.   

The pandemic is an unprecedented crisis, and participants in financial distress may have no choice but to reluctantly “break the glass” with a 401(k) loan or distribution to cover financial emergencies. That said, as the old adage goes, “this too shall pass,” and as plan sponsors make these decisions—and as plan fiduciaries implement them—it’s critical to take effective steps to balance current needs while preserving long-term retirement benefits.

 

Bradford Campbell is the former assistant secretary of labor for employee benefits and former head of the Employee Benefits Security Administration and is currently a partner at Faegre Drinker Biddle & Reath LLP. He is a member of Custodia Financial’s Strategic Advisory Council (SAC) and serves as paid outside legal counsel to Custodia Financial. Nothing in this article should be considered as financial or legal advice. Plan sponsors should consult their own financial and legal advisers for guidance.   

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

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