The world has changed as a result of COVID-19, and many things will never be the same. Your 401k plan needs to evolve to better fit the new relationship you have with your employees.
Following are five 401k updates you should consider making to your plan in response to COVID-19.
Suggested 401k Updates
1. Make the right decision on CARES Act withdrawal and loan provisions
Of the five 401k updates I am suggesting, this is likely the most discussed. You may have made a decision already about whether to adopt the CARES Act provisions relating to withdrawals and loans. Nearly all recordkeepers were proactive in sharing amendments to adopt these provisions – and as a result most plan sponsors adopted them without much thought.
The majority of plan sponsors adopted the entire package of changes their recordkeeper shared with them. Many didn’t realize that they could adopt some, all or none of the provisions.
With extended and expanded unemployment benefits and with many companies taking Paycheck Protection Program (PPP) money and retaining employees, a majority of plan participants have yet to incur financial hardships as a result of COVID-19.
Adopting and communicating looser 401k withdrawal provisions may make it appear as if your company is encouraging employees to take these withdrawals. Employees who take them can cripple their ability to build an account balance large enough to retire.
A recent Employee Benefit Research Institute study concluded that the average participant who takes a COVID-19 withdrawal will reduce their final account balance by 20%. COVID-19 withdrawals should only be considered as a very last resort. And for many participants, a CARES Act loan may be a better solution than a withdrawal.
Keep in mind that I am talking about those individuals who remain your employees. Individuals who lost their jobs are eligible to take their entire account balance as a distribution, subject to appropriate taxation.
Make the best decision on adopting these provisions for your employees – don’t feel as if you need to do what everyone else is doing. Remember, you can adopt or change these provisions at any time. Take a look at my post discussing the pros and cons of adopting CARES Act withdrawal provisions before you make this one of your 401k updates.
2. Adjust your fund lineup
The economic environment has changed significantly and, as a result, this is one of the 401k updates I feel most strongly about.
Most experts feel that inflation is going to be a part of our future. Does your fund lineup contain investment options that allow your employees to protect their 401k balances against inflation?
Do you offer an inflation-protected bond fund and a commodities fund? Most 401k plans don’t offer inflation-protected bond funds because guarding against inflation hasn’t been a problem for many years.
It’s time to consider adding these funds, and while you are thinking about your fund lineup, take a look at your target date series. You want to make sure you are offering your employees the best target date funds. Recent litigation reinforces that employers must offer the best possible combination of low cost and solid performance in the target date series they offer.
3. Add Roth 401k options
Because the tax environment is likely to change soon, 401k updates relating to Roth 401k accounts appear to be smart moves.
With all of the fiscal stimulus we are experiencing, it would seem that federal tax rates, and possibly most state tax rates as well, will be higher in the future. After all, the government doesn’t pay for all of this stimulus — we do as taxpayers.
Roth 401k accounts are funded with after-tax 401k contributions that generate earnings which accumulate tax-free. Provided balances have been in the plan for at least five years, contributions and earnings can be withdrawn tax-free at retirement.
Since we are at historically low tax rates at the federal and state levels, making Roth 401k contributions right now makes a lot of sense. Make sure your plan offers Roth 401k accounts.
And, when markets crash, it can be a smart move to convert before-tax 401k balances into after-tax Roth 401k balances. We likely won’t be out of the COVID-19 woods for quite a while and markets are certain to be volatile until we have a vaccine, so make sure you offer this capability to your employees as well.
4. Maximize use of health savings accounts (HSAs)
This is one of the 401k updates that doesn’t relate directly to your plan, but it involves a more intelligent use of employee contribution strategies.
Do you offer a high-deductible health plan (HDHP)? If so, your employees have access to HSAs. Because these accounts are triple-tax-free, they are superior to 401k accounts in terms of saving for retirement.
Make sure any employees electing your HDHP are maxing out their contributions to their HSAs first. Follow the procedure shared in this post, which outlines a contribution strategy where employees max out their HSA contributions and receive the maximum company match.
In order for employees to understand how to integrate their HSA contributions with their 401k contributions, be sure to include a description of this process in your annual employee education sessions.
5. Work with the right recordkeeper
Technology has become super important as a result of COVID-19. That means your plan’s website, provided by your recordkeeper, has become a more important part of your overall 401k plan offering.
Not only is your plan’s website a source of account balance information, but the technology available should allow your participants to easily model retirement scenarios, calculate appropriate contribution rates and download educational videos. The site should also be intuitive – easy to figure out and understand.
Right now only a handful of recordkeepers are deploying websites that meet these criteria. An important part of your participants’ perception of the value of your 401k plan is the quality of the website they interact with. If you don’t work with a recordkeeper that has an above average website, find a different recordkeeper. Don’t wait for the website upgrade — that can take years.
Our lives will never return to what they were. Your participants’ expectations of their 401k plan have permanently changed as well. Be sure you consider making these 401k updates to your plan soon.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.