Within the past couple of years, there has been a flurry of laws and regulations enacted to address the challenges workers face in saving sufficiently for retirement and provided short-term COVID-19 pandemic relief (financial and otherwise). Several legislative changes impacted retirement plan benefits offered by employers where the legislators were attempting to address key issues facing today’s workers through the incorporation of new retirement plan provisions.
Improving the retirement savings rate
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 included several provisions intended to improve the retirement savings rate for workers. One change requires plan sponsors to provide each participant with two separate examples illustrating their account balance converted to a lifetime income product. The hypothetical examples are intended to help participants recognize whether they are on track to generate sufficient income to fund their retirement and to better understand how their savings translates into an estimated monthly dollar amount. The participant can then use this information to better plan their savings rates, if needed.
The SECURE Act also provided a safe harbor pathway for 401(k) plans to offer annuities (perhaps not coincidentally as some anticipate an increased demand for annuities or other products that provide lifetime income). A recently introduced bill—dubbed SECURE 2.0—would also ease restrictions on Qualified Longevity Annuity Contracts (QLACs), if passed.
When considering adding lifetime income benefit options, employers should assess whether this strategy is a good fit for the organization and its employees. Adequate investor education is crucial when incorporating these options to ensure participants are fully aware of the costs, benefits, and risks associated with annuities.
Enhancing access to retirement funds while also plugging the “leaks”
While retirement plans allow for in-service withdrawals for serious financial hardships and participant loans for significant expenditures, many workers perceive retirement funds as their most viable option to cover routine expenses and budget shortfalls. Even prior to the COVID-19 pandemic, it was estimated that more than a third of Americans would be unable to manage a $400 emergency expense, according to 2019 data from the Federal Reserve.
With the pandemic spurring an increased need for loan and withdrawal assistance, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (passed in March 2020) temporarily eased defined contribution loan, withdrawal, and repayment rules for participants affected by the pandemic. While most of the provisions were discretionary, a significant number of employers adopted them. A November 2020 report from the Plan Sponsor Council of America (PSCA) showed that about a third of employers offered increases in plan loan. About a quarter of plan sponsors noticed an uptick in loans since the onset of the pandemic, while more than a third saw an increase in withdrawals.
- Increased participant access to retirement funds is a concern for the long-term impact on retirement readiness. This so-called retirement fund “leakage” (which occurs through early withdrawals for hardship, participant loans taken but not repaid, and other cash-outs) represents a significant challenge to building workers’ retirement preparedness. Some employers are incorporating special tactics and tools to discourage participants from using their retirement plan accounts as “rainy-day” funds, including:
- Greater restrictions and limits on participant loans (including limits on the number of loans and allowing loans only for serious financial hardships)
- Use of sidecar savings accounts, which are savings accounts linked to the participant’s retirement plan account
- Offering an employee financial wellness program
- Encouraging use of alternative sources of funds or borrowings
Assisting with student loan debts
Student loan debt is a crushing burden for many American workers: Americans carry a total of $1.7 trillion in student loan debt, according to Federal Reserve data. The CARES Act provided some temporary relief through suspension of repayments and interest accruals (through a zero percent interest rate) on federal loans through September 30, 2021. The Act’s provision allowing employers to pay up to $5,250 toward an employee’s student loans as a tax-free benefit was recently extended through 2025 by the Consolidated Appropriations Act (CAA). The proposed SECURE 2.0 legislation also includes a provision allowing employers to make matching contributions to employee 401(k) plans based on their student loan repayments.
These offerings may be attractive as an approach to attain and retain workforce talent, but be sure to realistically consider what portion of the employer’s workforce would actually benefit from this assistance. Employers interested in helping employees manage their student loan debt should work with service providers to understand the various tools available and investigate any potential downsides of the benefit (which can be expensive).
Monitor legislation and trends while preparing for change
Changes and trends in retirement benefits are often driven by legislative or regulatory action. Since retirement plan solutions are often developed as a direct response to legislation, we encourage employers to monitor recent and ongoing legislation for temporary or optional provisions that could become permanent components of retirement benefits.
The axiom “change brings opportunity” is a notable reminder as employers face today’s evolving workforce and workplace. Employers have an opportunity to use these legislative changes to redesign retirement benefit offerings to better meet employee needs as well as to further their goals and objectives.
Written by Beth Garner and Joanne Szupka. Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com.