As Pandemic Drags On, Don’t Let Clients Forget the Fundamentals

Advisers should watch out for unwitting partial plan terminations tied to layoffs and lasting damage to employees’ retirement readiness caused by hardship withdrawals.

Earlier this week, Joe DeNoyior, president of Washington Financial Group, part of HUB International, spoke with PLANADVISER about HUB’s ongoing merger and acquisition (M&A) efforts, alongside his colleague Adam Sokolic, chief operating officer (COO) for HUB’s retirement and private wealth division.

Though much of the conversation focused on M&A plans for the rest of 2020 and onward into 2021, the pair also a point to emphasize some findings contained in HUB’s recently published “2021 Employee Benefits Outlook” report.

“The challenges that COVID-19 has brought to plan sponsors cannot be overlooked—they can’t be swept under the rug as we try to return to normal next year,” DeNoyior says. “This is the time to be asking, ‘Has a plan’s participation rate decreased meaningfully? Has significant leakage occurred?’ If so, do plan sponsors have strategies in place to get their people saving again, either now or once we navigate the pandemic?”

Sokolic and DeNoyior warn the financial challenges employers and employees are facing this year could have a major impact on the health of retirement plans and cause reduced retirement readiness for broad swaths of the U.S. workforce. As the outlook report suggests, employers should closely monitor how employee participation in their retirement plan has changed in comparison to participation in the past decade. There may be lessons to learn from considering what happened in the wake of the Great Recession, as well.

“Gaining insight into employee behaviors will give you a better idea of the most important impacts of waning participation—and compliance issues that might arise for fiduciaries of the plan,” the report says. “For example, if a company eliminated or delayed its 401(k) match, did this prompt employees to stop participating in the plan? That could guide how you proceed in reinstating it.”

Another concern highlighted in the report is the extent to which employees acted on legislative provisions to raise the limit on 401(k) loans and allow for penalty-free early withdrawals on individual retirement accounts (IRAs) or 401(k)s. Either move, available through the end of 2020, might help to mitigate financial stress in the short-term, but could potentially have a dramatic negative impact on an individual’s long-term success in the plan, including tax problems and financial difficulties.

“We have already been spending a lot of time talking to our plan sponsors, analyzing their employees’ behaviors,” DeNoyior says. “One thing we have identified already is an increased demand for financial wellness programs. Employees are experiencing a lot of financial stress, and they want help.”

Though some have put new programs in place, DeNoyior says, a lot of plan sponsors have used this time to “reintroduce” their existing financial wellness tools and services. Many had innovative tools and services in place that were not being used fully before the tumult of this year, he explains.

Sokolic says there is likely to be a renewed focus on plan health and fiduciary responsibility in 2021, as employers move from survival mode to again considering their longer-term future.

“We think that, during 2021, we will slowly see that transition back to long-term, strategic thinking about plan design and fiduciary responsibility,” Sokolic proposes. “I think we will see renewed discussion of the SECURE [Setting Every Community Up for Retirement Enhancement] Act, for example.”

Before that point, DeNoyior says, the issue of “potential partial plan terminations” deserves immediate attention.

“Layoffs and furloughs may have been an economic necessity in 2020, but many employers may not realize the implications reach beyond their payroll,” he warns. “If 20% or more of a qualified retirement plan’s participants are let go during the course of the plan year, a partial plan termination may be triggered.”

Such an outcome means that affected employees’ accounts must be immediately 100% vested to the extent that they are funded, among other things. The HUB report says this gives rise to issues ranging from recordkeeping challenges to plan documentation discrepancies.

“Ideally, plan advisers have been providing guidance on this issue through the year,” the report says. “The consequences of not recognizing the partial plan termination has been triggered can be severe, such as the administrative burden of reinstating forfeited balances.”

In addition to assessing the plan’s investment performance and fees, plan sponsors should also review participant complaints or concerns about investment services, the report concludes. It would also be prudent to confirm whether participants had uninterrupted access to investment tools and resources when they needed them the most.