Your Retirement Plan—What To Do Next?
If you provide a 401(k) or other defined contribution retirement plan for your employees, you are probably now dealing with a variety of unanticipated issues as a result of the downturn in the economy. Can you, for example, still afford to match some or all of your employees’ plan contributions? Does offering a benefit like a retirement plan still make sense?
What’s more, the severe decline in investment values may have rattled your employees who participate in the plan. Your employees may be asking you about losses in their plan accounts and what they should do next—even whether they should continue to participate in the plan. Other employees may be worried about what will happen to their retirement savings if the financial firms managing their plan investments fail.
These are all difficult questions. However, the following points may help you in your decision making.
Continue Offering a Retirement Plan?
The reality is that only you can determine what adjustments, if any, you may need to make to your benefit structure after looking closely at your financials. However, odds are that a key reason you offer a retirement plan to your employees is that you believe the benefit helps your company attract and keep the most qualified and competent employees. In addition, your retirement plan provides significant tax benefits. Those tax advantages have not changed. And keeping the best and most motivated employees working for your company is probably more crucial to your company’s financial health during a recession than it is when the economy is strong.
Maintain, Reduce, or Eliminate the Match?
Matching contributions have been shown to increase plan participation rates. Obviously, your decision whether to continue offering a match will depend on your company’s financial health. Your need to conserve cash may force you to take an action you’d prefer not to. Still, your employees are likely to understand the situation if you explain why you plan on reducing or suspending the match.
Be aware that you’ll have to meet certain regulatory requirements before you can suspend or eliminate a match. In addition, there may be other restrictions related to the pension law’s nondiscrimination and safe harbor rules. So proceed with caution if you choose to take this road.
Answering Employees’ Questions
Employees with questions about their retirement accounts should be encouraged to access the plan’s website and to read plan-provided investment education materials. These sources may be sufficient to answer many of your employees’ questions. Key points that may be relevant in this environment include the following.
Investment losses: Plan participants should be aware that their losses are only paper losses until they decide to sell (or redeem) their shares. If participants plan on making changes in their portfolios, they should determine if the changes make sense in light of their investing time horizons, overall financial goals, and their tolerances for investment risk.
Volatility: Stocks rise and fall in value every single trading day. These price movements, known as volatility, can become extreme under certain circumstances. The conditions of the last several months have created apprehension among investors and that, in turn, has produced extreme downward volatility in stock prices. Historically, however, the long-term direction of the stock market has been upward. (Past performance does not predict or guarantee future results.)
Safety of plan assets: Your employees need to understand that you—the employer—and the financial firm(s) acting as custodian, managing and investing their retirement savings, are not permitted to commingle participant plan assets with your own accounts. The assets of a qualified retirement plan are legally held in a trust, separate and apart from the assets of the employer sponsoring the plan. These assets must be used solely to benefit plan participants and beneficiaries.
Determining the best direction forward during this challenging period may require the input of outside advisors. We would be happy to help your firm look for ways to maximize your financial resources.
“The assets of a qualified retirement plan are legally held in a trust, separate and apart from the assets of the employer sponsoring the plan.”