Compliance April 3, 2020

Building Digital Connections in a Socially Distant World

Those few remaining advisers who have been reluctant to integrate digital communications as a core part of their client service strategies have little choice but to reconsider in this new world.

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Technological tools such as email, video conferences and webcasting have been around for decades.

Recent years have seen plan advisers refine their use of these tools and come up with more targeted and productive approaches to reaching clients. And, now that it’s become clear that the coronavirus pandemic can be expected to disrupt business as usual for the foreseeable future, such technologies will get a real chance to demonstrate their usefulness.

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“Business still needs to be conducted,” says Jason Crane, head of retirement distribution for Ascensus, in Dresher, Pennsylvania. “We closed a significant proportion of our new business last year leveraging our technology capabilities. We anticipate only heightening our use of technology here in the forthcoming months.”

J.P. Morgan Asset Management, for its part, is using videoconferencing to keep its financial professionals in regular contact with plan sponsors. Hectic travel schedules have been transformed into busy weeks of remote conferences and video calls.

“We’ve also incorporated into their weekly activity the ability to use more of a digital engagement approach delivered through Cisco Systems Inc.’s Webex platform,” explains Mike Miller, who heads J.P. Morgan’s U.S. retirement plan services out of Chicago. “Leveraging this telepresence, you can get on a call with six or seven clients even on a Friday. We’ve incorporated this as a best practice across all of the sales teams.”

Staying Connected in a Challenging Time

Miller says J.P. Morgan wants its financial professionals to have as much contact as possible with clients, without wasting time stuck in airports or hotels.

“Does it need to be face-to-face every time? No,” Miller says. Other firms that serve the plan sponsor market have reached similar conclusions.

“For most advisers these days, it’s not good enough just to show up once a year,” says Forrest Wilson, vice president, national sales, Ameritas Life Insurance Corp., in Lincoln, Nebraska. “You need to be a lot more engaged with your client.”

Wilson says that even in a digital-first setting, clients appreciate regular contact, and this is doubly true during periods of market turbulence.

“Advisers need to be the source that’s going to educate their client and take advantage of the opportunities,” Wilson adds.

To supplement their phone calls and teleconferences, advisers are coordinating newsletter publication schedules and leveraging social media outlets, such as LinkedIn, to bolster outreach to clients.

Kevin Morris, vice president and chief marketing officer for retirement and income solutions at Principal Financial Group in Des Moines, Iowa, says the 15,000 to 20,000 retirement plan advisers in the United States employ a variety of approaches to using technology as a marketing device.

“The strategy depends on the sophistication of the financial adviser,” Morris says. “If they have 30 clients, they can be very connected to those clients on LinkedIn and remain in touch with the CFOs [chief financial officers] and the heads of HR [human resources].”

Larger firms will obviously have a harder time staying connected to a larger client base, but, on the other hand, they should have more staff and monetary resources to devote to maintaining digital connections.

“Demonstrating leadership isn’t about telling everybody how smart you are about all the retirement planning stuff,” Morris warns. “It’s about simplifying and packaging information in a way to make it easy and digestible for others.

A Reliance on Remote Work

Strategic Retirement Partners (SRP) has developed a “heavy reliance” on remote work capabilities over the past decade. Unsurprisingly, the coronavirus pandemic and its associated travel restrictions have demonstrated the value of the remote work setup.

Even before the crisis struck, about 70% of the firm’s employees regularly worked from their homes, and that arrangement has permitted the firm to more or less sustain its normal operations, including contacts with plan sponsors.

“All of the advisers around the country have done call-ins to all their clients to check in, to see how they’re doing,” says Jeff Cullen, managing partner for the firm in Shorewood, Illinois. Cullen says SRP is planning to put its experience with remote work to good use by writing a white paper for plan sponsor clients with advice about managing a remote workforce productively.

“Over the years, we’ve learned a lot of do’s and don’ts,” Cullen says. “By having everything in the cloud and staying all connected the way that we do, it’s just an interesting way to do business.”

Cullen adds that since SRP moved to a primarily remote work setup, the firm’s ability to share information among advisers has seen big improvements, and the firm has been able to share what it has learned with its clients.

“It really empowers us to respond to something like this much, much faster than if we weren’t wired the way that we’re wired,” Cullen concludes.

Compliance April 2, 2020

Hard Choices Ahead About Easing Hardship Withdrawals

With the coronavirus pandemic causing acute financial harm to so many Americans, plan sponsors may feel compelled to offer hardship withdrawal relief in their plans; plan advisers can help them make the best decisions for their workforce by, for example, endorsing loans over outright withdrawals. 

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Among the many retirement plan focused provisions included in the Coronavirus Aid, Relief and Economic Security (CARES) Act is an easing of the rules and penalties restricting early withdrawals from defined contribution (DC) retirement plans.

The law created a new emergency retirement plan distribution option dubbed the “coronavirus related distribution,” or “CRD” for short. Under the CARES Act, a CRD can be drawn from an employer sponsored retirement plan, such as a 401(k) or from individual retirement accounts (IRAs), in any amount up to $100,000. The normal 10% penalty tax levied on early plan distributions by the Internal Revenue Service (IRS) is waived for CRDs, and furthermore, the individual taking a CRD can spread the reported income over three years for tax purposes. The distribution also can be repaid within three years to avoid taxation.

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Financial advisers know hardship withdrawals are one of the main sources of leakage from DC plans, and in normal circumstances, they do all they can do limit such leakage. But the coronavirus pandemic is a different situation, says Ross Bremen, a partner in NEPC’s defined contribution practice.

“The global impact of the disease itself is unprecedented in our lifetime,” Bremen observes. “This is a novel situation—people can’t go out to work and they can’t live their normal lives. Many people have died, and unemployment levels have spiked in a way that we have never seen before. The markets have obviously been severely impacted.”

In a word, the global health care and financial systems and all of their constituents, from major corporations to individual Americans, are facing serious hardships, Bremen says. For that reason, it makes sense that Congress has taken the dramatic step of giving plan sponsors significant room to expand their pre-retirement hardship withdrawal programs.

“The hardship expansion will clearly help some Americans who are facing a cash crunch,” Bremen says. “However, we as an industry need to be careful about explaining some of the mixed messages in this relief package.”

RMDs Versus CRDs

The main mixed message of the CARES Act, Bremen and others say, is that, on the one hand, it waives all required minimum distributions (RMDs) for 2020, based on the understanding that forcing retirees to pull money out of their equity investments right now will lock in the significant losses experienced so far this year. But at the same time, the law is seeking to make it easier for people who are not yet retired to make early, penalty-free hardship withdrawals of up to $100,000. Making such withdrawals right now—assuming the dollars are coming from the sale of equity investments—will lock in dramatic equity losses, just like taking an ill-timed RMD.

“As advisers and service providers, it’s our job to help cut through these mixed messages and help sponsors and participants make the best decisions,” Bremen says. “Participants, especially, must understand the impact of taking money from retirement plans in declining markets. Even backing away for a short time can be very detrimental. We saw in the last two weeks that missing a single day can mean missing an 11% bounce.”

Mark Iwry, former senior adviser to the secretary of the treasury in the Obama administration and currently a nonresident senior fellow at the Brookings Institution and a visiting scholar at the Wharton School, agrees with that assessment.

“The CARES Act retirement distribution [CRD] and loan provisions may represent a bit of a reflexive reaction,” Iwry says. “Of course many Americans are now facing extraordinary financial exigencies, and some will have to turn to their retirement savings as a last resort for liquidity. But, I think we need to be careful with at least our messaging about CRDs and loans to make sure participants understand the potential impact on retirement security.” 

Iwry says it might even be appropriate for plan sponsors to consider first implementing the more generous CARES Act loan provisions doubling  the amount of loans that participants can take—from $50,000 to $100,000—and extending loan repayment periods. Sponsors might then assess employees’ need and demand for CRD distributions in addition to loans.

“I also wonder whether the $100,000 CRD provision will have an ‘endorsement effect,’” Iwry says. “Will some participants see this as an invitation from the government and their employer to consider withdrawing up to $100,000 penalty-free, and perhaps borrowing up to another $100,000 during the statutory window even if they don’t urgently need them?”

In other words, some financially secure workers who might not need up to $100,000 (or $200,000 including the loan) in cash right now might see the CRD as a window to access funds penalty-free for a future emergency, or for another financial purpose beyond paying near-term bills and expenses.

“Participants could be tempted by the optionality of being able to repay the CRD distribution within the three year window to avoid income tax, but meanwhile holding onto it as a security measure in this uncertain time,” Iwry observes. “Unfortunately, taking the distribution during the current market dip will probably amount to a sell-low, buy-high strategy—buying into equities after the market has recovered if they repay the CRD. Also, that distribution will readily spend itself in the near term, but later will be hard to reconstitute and recontribute. By contrast, behaviorally, a plan loan benefits from the greater discipline of steady loan repayment via required automatic payroll deduction, unless employment terminates during the repayment.”

Steps by Providers

Charlie Nelson, chief executive officer, retirement and employee benefits, Voya Financial, says retirement plan recordkeepers are also concerned about leakage in this challenging time—though they are doing their part to provide liquidity to those who need it.

“With lost wages, significant health care costs and other unexpected expenses, we recognize that some may have no choice but to access their retirement savings to address the financial challenges that they are facing today,” Nelson says. “As always, we encourage individuals to balance their short-term cash needs with long-term goals, such as retirement readiness. We generally encourage individuals to consider flexible and health savings accounts [HSAs] for addressing health care costs. But, if a distribution from a qualified plan is needed, individuals should give careful thought to their options and consider several factors, including their short-term financial needs, tax implications and how they may replenish retirement funds in the future.”

Matching the steps taken by various other providers, Voya is providing Americans with free access to a range of online resources, such as CARES Act analysis and virtual group education meetings. The firm will also provide phone-based meetings with financial professionals, subject to availability and limited to general education as opposed to individualized advice.

Nelson says this free support is intended to help individuals understand the CARES Act and the trade-offs involved in choosing among available financial resources: loans, hardship withdrawals, etc.

Empower Retirement is another provider that has announced efforts to help Americans contemplating taking hardship withdrawals. For starters, moving forward, the firm will not charge origination fees on any new plan loans and will suspend charges for all hardship withdrawals. These changes cover “all tax-qualified workplace retirement plans administered by Empower that permit such distributions.”

“We must do everything we can to accommodate the immediate financial needs of our customers,” says Empower Retirement President and CEO Edmund Murphy III. “Some are already in financial distress right now and need access to their retirement savings to support their loved ones. We are taking these steps to help those families.”

The fee waiver will remain in place until further notice, depending on circumstances in the economy and financial markets, Murphy says. He adds that Empower has “bolstered all call center capacity” and elevated the availability of one-on-one counseling sessions to meet the needs of retirement investors seeking advice.

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