Plan Insights Amid COVID-19: Your Company Match and Distributions
We are currently experiencing unprecedented times that are presenting many challenges. As an employer, you are likely making difficult decisions about the future of your business and the best ways to be safe, continue operations and support your workforce.
Similarly, individuals are facing the difficult challenges of maintaining their family balance sheets that may be dramatically changing due to layoffs or increasing costs for things such as health or childcare.
It is easy in a volatile time like this to discount the importance of saving for the future and focus on immediate needs. But it is also important to remember that our actions in times like this will help to dictate future outcomes.
Here are two questions that may be top of mind regarding your retirement plan during this time:1. Should I change how my retirement plan is structured to cut costs?
No matter your outlook on this current situation, I can say without hesitation that retirement plans play a critical role in helping employees save for the future. The regular and automatic habit of contributing and investing starting at an early age, by and large, creates better retirement outcomes.
I cannot speak directly to a unique business’s financial situation and immediate cash-flow challenges. However, generally companies are better off when employees can retire when the time is right and when they can work without distraction or money-related stress.
There are many hard costs to consider but please also consider your answers to these questions:
- What are the less quantifiable impacts to your workforce in the longer term?
- What is the message that you are sending to your employees about the importance of saving?
- Are your employees more likely to change or stop their regular contributions as a result or your actions?
Again, the decision to change a plan to reflect to a new/current situation is up to the employee. I would encourage employees to fully investigate the impact of changes on plan costs with a trusted financial advisor.
2. What do I tell my employees who want to take loans or distributions?
As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a plan may have updated to include increased plan loan limits and Coronavirus Related Distributions (CRDs). While these options now exist, it is important that employees fully understand the impacts of their decision to borrow or remove funds from their retirement account. When making the decision to borrow from a retirement plan, employees should consider:
- The Cost of Repayment
The cost of borrowing from a retirement plan may seem low, but employees should consider that they’ll be paying themselves back with after-tax dollars. For example; If they are in the 24% tax bracket, every $1 they earn to repay their loan leaves them with only 76 cents for that purpose. The rest goes to income tax.
- The Opportunity Costs
Any funds that are withdrawn from an account will not be generating investment returns. This means that the cost of the loan is also the equivalent of missed total returns, and this could impact their ability to save enough for retirement. Additionally, taking money out when there is a decrease in value can lock in the losses, and employees may not get the potential returns as the market regains its value.
- Impact of Job Loss or Job Change
If an employee loses their job or leaves a company, they will be forced to come up with the outstanding balance in less time. If they can't repay the money, the loan will be treated as a withdrawal, including implications of paying income tax and penalties.
Employees should consult with their financial advisor or record keeper to understand the specific rules of their plan. This would also be an excellent opportunity for them to provide one-on-one financial counseling for your employees if this is a service that they offer.
Saving in a retirement plan regularly over a long period gives employees the benefits of compounding interest, meaning the ability to generate investment returns by investing in previous returns. Taking distributions from a plan, especially when younger, can substantially impact how much they will be able to save for retirement.
As a financial advisor, the core of my job is to help people think long-term. To help them visualize what they would like their future to look like and what actions they can take now to make those dreams for the future a reality. As you consider changes to your retirement plan and help employees navigate new challenges, please do not discount the importance of keep retirement savings intact.
The material and opinions provided in this document are meant for general illustration and/or informational purposes only and should not be construed as investment, tax, or legal advice for any individual. Although the information has been gathered from sources believed to be reliable, each reader must decide whether it is valid and applicable to his/her own unique circumstances. To determine which investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any economic forecasts made in this commentary are merely opinion, and any referenced performance data is historical. As a result, neither is a guarantee of future results, as all investments involve risk. All referenced indices are not managed and may not be invested into directly. Investment advice offered through Resources Investment Advisors LLC, an SEC-registered investment adviser.
Posted by Brady Dall
Brady has dedicated his career to retirement plan industry and has served it in many capacities over the years. He’s is a partner with 401k Advisors Intermountain who was honored as the 2017 Retirement Plan Adviser Team of the Year and has clients who’ve been named PLANSPONSOR of the Year.LinkedIn