My latest article for JDSupra.com can be found here.
As the turd in the punch bowl as I affectionately call myself, I am a little too frank on what is going on in the 401(k) industry.
The Coronavirus pandemic is something that hasn’t been seen in this country, probably since World War II. Right now, we don’t know how many people will lose their jobs or be furloughed during this time. While I’m glad that distributions to participants negatively impacted by Coronavirus won’t get the early distribution penalty (for those under 59 ½), the inevitable leakage for retirement plans isn’t good for participants and for plan providers.
Plan participants will lose out because they will invade their retirement savings for money they need today and they will do so after the market has gone down from 25-40% (depending on when they get their distribution).
The 401(k) industry is going to get hurt by this because it’s a business dependent on plan asset size and leakage through hardship distributions and termination distributions will negatively impact the amount of fees that many providers take.
This is the reality we live in. People negatively impacted by this pandemic need relief, but many in the 401(k) industry will pay a price for it with reduced fees because of a market downturn and leakage through distributions. Participants who need the money now, aren’t going to doing better.
With so many layoffs and furloughs thanks to the Coronavirus Pandemic, plan sponsors don’t have the cash that they did before.
If you have plan sponsor clients with safe harbor 401(k) contribution, stated matching contributions, or required minimum funding contributions under a pension plan now is the time to have the discussion with them before it’s too late and they end up paying more in contributions that they may not be able to afford.
Being pro-active with them will allow you to look good in their eyes and allow them to avoid making contributions that they can’t afford.
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act (the “Act”) into law with substantive retirement plan changes.
Among the changes:
Distribution free from the early distribution penalty.
Coronavirus-related distributions that don’t exceed $100,000 won’t be subject to the 10% early distribution penalty under Code Section 72(t). The early distribution penalty won’t attach to any distribution from a qualified plan that is made on or after January 1, 2020, and before December 31, 2020, to an individual participant who is one of the following:
The plan administrator just has to rely on the affected participant’s certification that he/she falls under this exception to the early distribution penalty. Tax on the distribution can be spread pro-rata over three years. The individual has an opportunity to repay the coronavirus distribution to the plan over the next three-year period which begins on the date following the distribution.
Plan Loans. The CARES Act expands access to plan loans for “qualifying individuals,” a group defined to include only those individuals who qualify for a Coronavirus-Related Distribution (described above). The maximum loan that can be taken is increased to the lesser of $100,000 or 100% of an individual’s vested account balance. This Coronavirus related limit is double the current limit under the law (which is the lesser of $50,000 or 50% of an individual’s vested account balance.) Also, affected individuals with outstanding loan balances on or after the date of enactment of CARES ACT may be allowed to delay loan repayments for up to one year regardless of the five-year repayment period. So that means that future payments will be adjusted to reflect interest accrued for the period of delay and the term of the length of the loan will be extended.
Minimum Distributions Waived. The required minimum distribution requirements are waived for distributions that should have been made in 2020 for a required beginning date that occurs in 2020.
Relief for pension plans. Minimum contributions to single-employer plans which would be due in 2020 shall be due (plus accrued interest) January 1, 2021.
Student Loan Relief. The CARES Act will allow employees to exclude up to $5,250 in employer-paid student loan principal and interest from income in 2020. Employers can make the payments directly to an employee or the lender under an educational assistance program established by the employer under Code Section 127. Thus provision applies to student loan payments made before January 1, 2021.
Plan Amendments. Plans don’t have to be amended until the last day of the first plan year commencing on or after January 1, 2022.
In life, choice is usually a good thing. However, when it comes to daily valued 401(k) plans, too many choices isn’t a good thing. It sounds counter-intuitive, but too many choices offered to plan participants is usually a mistake.
Offering participants the right to self direct their own 401(k) account sounds like a great idea because plan sponsors are giving a plan participant a choice in shaping their retirement. The problem with these choices is that plan participants get paralyzed by being offered too many choices; they tend to get overwhelmed. For example, people assume offering so many different mutual funds on a plan’s investment menu is the way to go. However, studies have shown that the more investment options offered under the plan, it tends to actually depress the deferral rate of plan participants. Offering 57 mutual funds on a lineup sounds like a good idea on paper, but it overwhelms plan participants to the point that they don’t want to participate and defer their income.
The same can be said by offering participants a self-directed brokerage account. Allowing plan participants the right to a brokerage window within the 401(k) plan allows them to purchase stocks and other investments apart from the typical mutual fund menu offered under a 401(k) plan. Again, a study has shown those plan participants who use a brokerage window tend to have a worse rate of return on their 401(k) account than those participants who stick to the core fund lineup.
CitiBank used to have a jingle in their ads in the 1980s that “Citi never sleeps, CitiBank”. While most of us are hunkered down thanks to this Coronavirus epidemic, it doesn’t mean that as the plan sponsor, you can just fall asleep.
As a plan sponsor, you still have to exercise your fiduciary duty prudently. You still have to deposit salary deferrals promptly and you have to make sure that plan sponsors are informed as they are legally required.
As long as we don’t receive guidance from the Internal Revenue Service or Department of Labor top the contrary, to quote Bill Belichick: “do your job.”
Over the years, I worked with many organizations starting back with student political organizations and the school paper at Stony Brook. This includes actual businesses, civic and religious organizations. Many of these businesses and organizations thought that advertising was the be-all and end-all in getting new business for these companies and members for these organizations. I even designed and wrote copy for these ads.
The problem with advertising is that it’s not a be-all and end-all to help a business that’s struggling or an organization that wants members. Advertising can never fix what troubles many businesses and organizations and that’s culture.
If you’re a business with a culture of poor customer service, advertising won’t fix that. If you’re a civic organization and you run it like an exclusive clique while not interacting with new members, advertising won’t fix it.
As a retirement plan provider, you need to identify the issues as to why business isn’t growing because advertising may help, but it won’t fix the problems that might ail your organization.
I was a volunteer and officer for an organization where I stated that the leadership (not including me) was stuck in 1986.
What it meant was that this leadership couldn’t adjust to the current age when it came to recruiting new members and raising contributions. What worked well 30 years ago doesn’t mean it will work today.
I worked for a law firm that acted as if time stood still. I tried to use social media to generate discussions that would help me net clients, but the Managing Attorney didn’t get it even though her husband was doing the very same thing for his own law practice. She actually acted as if her husband was doing something that was embarrassing.
The point here is that the retirement plan business continues to evolve. Retirement plan rules change; the attitudes of plan sponsors change. The opportunity to get new clients changes. You need to be open to what’s new out there and determine what will work and what still works.
By the way, the best thing to happen in 1986 was the New York Mets. Thank you.