Choosing which is worse, the COVID-19 pandemic or the Great Recession of 2008 is like being asked to choose between having a root canal or a colonoscopy. They are both awful but they are awful in different ways. In terms of retirement plans though, it is certainly worth asking the question: how have these disasters impacted companies and their contributions to their retirement plans and what has been their impact on plan participants? Are participants taking loans and cashing in their 401(k)’s or are they being patient and, if they are still employed and earning a paycheck, holding off on taking plan loans and distributions?
The Impact on Company Matching Contributions
The Plan Sponsor Council of America (PSCA) took a survey of retirement plan sponsors of varying sizes. As it turns out, in contrast to the 2008-2009 financial crisis, more than 90% of employers will still make their retirement plan contributions this year. Not surprisingly, smaller companies are more likely to have reduced or suspended employer contributions in the wake of the COVID-19 pandemic. More than 1 in 10 smaller companies with fewer than 50 participants have made changes to their matching contribution formulas. That is more than three times the number of organizations that have 5,000 or more participants.
The survey found that over a somewhat longer period of time, four times as many employers suspended or reduced their company matching contribution as a response to the Great Recession as compared to now. Hattie Green, research director for the PSCA (which is part of the American Retirement Association) observed “where their retirement plans are concerned, employers’ responses to current conditions seem more measured than in 08/09 – we may be seeing the impact of lessons learned.” Perhaps company owners and their financial directors have learned to take a deep breath and not to panic.
In 2008, companies which did suspend their matching contributions experienced a decrease in plan participation to a much more significant degree (72.9%) than companies that did not change their matching contribution (14.4%). There was also a decrease in plan participation deferral rates. Factors contributing to more companies holding the line on their matching contributions as a result of COVI-19 are intriguing. The survey found that many companies thought the pandemic would not last all that long and of course; there was the government’s broad based assistance in the form of the Payroll Protection Program (PPP) as well employees who were furloughed receiving additional unemployment benefits. In 2008-2009, the government was much slower to act and when they did, their assistance was mostly limited to certain specific industries (financial, auto, etc.). Very little assistance trickled down to the employees.
The Impact on Participants
Remember that under the CARES Act, plan loans and plan distributions were made both larger and more accessible. Through June, companies had not noticed an increase in loans or withdrawals. Now however, as the PPP and unemployment benefits lapse, 25% of plan sponsors now indicate an increase in plans loans (up from just 13% five months ago) while nearly 40% of plans noted an increase in withdrawals.
A quick governmental response in the form of the CARES Act probably helped to provide reassurance that tempered participants’ making withdrawals from their accounts early on. Perhaps the knowledge that the money in their retirement plan had been made more accessible gave participants a measure of comfort that allowed them to delay pulling the trigger on loans and distributions.
Now, with the pandemic deepening in scope and employees beginning to be laid off again, plan loans and distributions have increased. Until the vaccines start to work their magic, I would expect this trend to accelerate. When people’s backs are against the wall, they are not going to worry about how they will retire. They are just trying to survive.
Many employers have largely remained resolute in their commitment to their employees and expect to continue the matching contributions to the retirement plans that they sponsor. With the economic impact of the pandemic continuing to wreak havoc on certain sectors of the economy it remains to be seen if reducing or freezing company matching contributions will accelerate. What we have learned though is that when a company does reduce or freeze its match, the employees in those companies tend to reduce or even eliminate their salary deferrals into the plan. If the employees are still employed and earning a paycheck, there really is no good reason why these two actions should be as connected as they are. However, the information gleaned from the Great Recession’s effect on employee salary deferrals is hard to ignore. When the company match gets reduced or eliminated, salary deferral rates decrease as well. And if that happens, the long term impact on participants’ retirement security will be significant.
Based upon a December 8th, 2020 article from the National Association of Plan Advisors (NAPA)