According to the Wall Street Journal, a likely wave of companies will suspend or reduce matching contributions to employee 401Ks to save cash as the fallout from coronavirus continues to threaten the economy and the business outlook. Among the early decision makers are Amtrak, Marriott and La-Z-Boy Inc.
As companies look to cut costs without layoffs, questions about 401K options are plentiful. There are ways to save money without jeopardizing the integrity of your plan. After all, companies spent massively in recent years adding more benefits to their 401K plans as a recruiting tactic in a tight job market. The coronavirus pandemic, while massively disruptive in its severity and uncertainty, threatens to undo all that good. That doesn’t have to happen.
Here are some options that can save you money and help you ride out these turbulent times.
Matching Contribution Suspension
Both the discretionary match and safe harbor can be suspended under the CARES Act. However, employers are required to give participants a 30-day notice before suspending a safe harbor match. The American Retirement Association has asked the Treasury Department to allow sponsors of safe harbor plans to reduce or suspend contributions immediately without the 30-day notice, arguing that without the change many small businesses would be forced to terminate their plans.
Companies could get immediate cost savings with this option as they will be able to save the money they would have contributed to employees. A company can then re-institute the plans when they’re financially able. Employers typically match half of the amount employees defer, up to 6%, according to Vanguard.
Consideration: Reducing contributions could trigger employees to cut their deferrals. The Wall Street Journal, citing the nonprofit Employee Benefit Research Institute, reported that 20% of workers in 401K plans that suspended matching contributions during the financial crisis in 20008 stopped saving in those plans for that entire year.
Freezing a plan could be a better option for companies that expect to make a speedier recovery from the economic downtown. With a freeze, plans remain intact but no new contributions are allowed. There are no rules governing how long an employer can freeze a plan. With this approach, however, assets in the plan are still subject to market conditions.
For companies with fast deteriorating financial conditions, termination may be the only choice. This should be an absolute last resort as it presents regulatory and logistical hurdles and added financial burdens on companies and plan administrators. In the event of a full termination, companies are on the hook for providing full vesting of benefits to all affected employees as well as offering a lump-sum payout or an alternative such as a direct rollover to another qualified retirement account. Bear in mind that significant layoffs or business reorganizations could trigger a partial termination if it causes a drop of 20% or more in plan participation.
Consideration: Employers must wait 12 months before adopting a new 401K plan after distributing all the assets of a terminated plan.
Furlough instead of termination – Furloughing employees ensures that they can still access health benefits, but they cannot take full distributions from their retirement plans as a furlough isn’t a qualifying event. However, under the CARES Act employees can still take distributions, without penalty, and access higher loan amounts.
Before choosing any of these options, employers should review their contracts with the plan’s service providers including the recordkeeper, third party administrators and investment advisors.