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Naturally, the defined contribution (DC) plan space has not been immune to the myriad challenges created by the COVID-19 pandemic. How are plan sponsors managing and adapting to this unprecedented crisis? Are participants pushing the panic button amid the climate of fear and uncertainty?
Plan sponsors juggling multiple demands right now
DC plans are unique in that plan sponsors do not control participants’ asset allocation, other than by setting the investment options from which participants may select. Thus, many of the critical decisions facing other institutional investors at this time — for example, “Should I increase liquidity?” or “Is it time to opportunistically invest in high yield?” — are somewhat irrelevant for plan sponsors.
That being said, sponsors are under tremendous pressure dealing with other issues right now. Notably, with so many company executives worried about business and cash flow in the current environment, many plans may have to make the hard choice to temporarily suspend employee-matching contributions. (For plans that have “safe-harbor” matches or contributions, the company must meet certain criteria in order to suspend them, including giving participants 30 days’ advance notice.)
At the same time that sponsors are being asked to cut plan costs, they are also fielding many concerns from plan participants. Atop that list, not surprisingly, are questions around participants’ ability to access their plan account balances to address unforeseen (and often exigent) circumstances triggered by the COVID-19 crisis.
CARES Act to the rescue
Fortunately, the recently passed federal stimulus package — the Coronavirus Aid, Relief, and Economic Security (CARES) Act — has delivered much-needed relief and flexibility to assist DC plan participants with pressing cash needs. Here are some of the highlights:
- Under a new distribution option for participants adversely affected by COVID-19,1 current and former employees may take penalty-free distributions of up to US$100,000 per individual.2
- The ordinary federal income tax owed on such distributions can be spread over a three-year period, and the normal 20% tax-withholding requirement does not apply.
- Participants have the opportunity to “re-contribute” the amount distributed from the plan within three years after the distribution is taken.
- Regarding participant loans, the plan loan limit is doubled to the lesser of US$100,000 or 100% of the vested account balance for a period of 180 days.3
- The loan due date is extended by one year for any plan loan repayments due between 27 March 2020 (when the CARES Act was enacted) and 31 December 2020.
Needless to say, plan sponsors, consultants, and recordkeepers are quite busy trying to help anxious participants understand their options and navigate this difficult time.
Optimizing investment lineups still a priority
That is not to say plan sponsors have put other priorities, such as potential investment manager replacements, on hold. Sponsors have a fiduciary duty to always monitor plan investments to ensure alignment with participants’ best interests, so the investment lineup changes that were in process (or being considered) before COVID-19 hit are continuing — in some cases, with renewed zeal. After all, plan sponsors and consultants are well aware that a crisis is the ultimate test of an investment manager’s resilience. I expect manager performance to remain under intense scrutiny going forward.
I also expect many plan sponsors to continue to think about adding retirement income solutions to their menus for older participants. However, I would not be surprised if newer ideas such as this are paused for the time being while sponsors cope with all the above issues, including closely monitoring their current investment lineups.
Plan participants not panicking — yet
Meanwhile, plan recordkeepers have begun to report the activity they are seeing at the participant level. Encouragingly, given DC plans’ broad adoption of target date funds (TDFs) over the past decade, many participants are sitting tight and letting the TDFs do precisely what they are intended to do — serve as a long-term investment strategy. Even among participants who manage their own asset allocation, the early news seems to be that trading, while having increased somewhat, is relatively modest. That could change of course, but as of this writing, most participants appear to be “staying the course.”
1As defined by the CARES Act. | 2This provision is optional for plan sponsors and, if adopted, applies to COVID-19-related plan distributions taken between 1 January 2020 and 31 December 2020. | 3The increased plan loan limit is optional for plan sponsors. If adopted, the 180-day period refers to 180 days from the date of enactment of the CARES Act (27 March 2020).
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