As COVID-19 upends business operations, it is changing 401(k) plan management. Plan sponsors face new responsibilities and urgent situations. Below is a checklist of tasks and issues for consideration, with recommendations of service providers whose assistance employers may seek.
1. Investment Management
During normal times, plan fiduciaries should monitor investments quarterly. Given today’s extreme market volatility, Investment Committees should meet more frequently and follow guidance provided by their plan’s Investment Policy Statement. Close scrutiny should be given to Target Date Funds as most have not served participants well in past periods of volatility. Sponsors will want to understand their fund series glidepath and its rebalancing strategy as part of their due diligence.
Sponsors who have delegated fiduciary investment management responsibility to advisors qualified to accept it under ERISA 3(38) are relieved of their investment monitoring responsibility. Others should rely on advisors to assist in their investment review.
2. Participant Guidance
Being invested in a diversified portfolio that is a good “fit” for a participant’s financial situation becomes especially critical when markets are volatile. The “gold standard” for 401(k) plans is professionally managed accounts to help ensure participants are properly invested. Regardless of a plan’s investment choices and levels of service, sponsors should now ask advisors to increase their availability to guide participants.
Advisors should also assist employers in calming employee fears. Information on the history of the market, past crises and recoveries, and the market’s permanent upward trend can help participants continue building to meet their retirement goals.
3. Preparing to Meet Participant Needs
Unfortunately, participants may experience great financial need as a result of COVID-19. Employers should consult with their plan’s Third Party Administrator to understand their plan’s allowable distributions as well as plan changes they may consider to provide participants greater access to their accounts.
Plans that allow rollovers from other qualified plans normally allow distributions of those assets at any time, but plans vary widely in what is allowed for in-service distributions, hardships and loans. Sponsors should determine which distributions are permitted and from which accounts (deferrals, earnings, safe harbor, QNEC/QMAC, profit-sharing, etc.), the number of loans permitted, the loan interest rate, etc. Additionally, sponsors will want to understand their ability to suspend loan repayments if an employee is temporarily on unpaid leave.
In addition to changing the provisions surrounding any hardship distribution or loan, the recently passed CARES Act permits employers to provide even greater account access for participants experiencing a COVID-19-related need. This includes higher loan limits – the lesser of $100,000 or 100 percent of the participant’s vested account balance. COVID-19 changes include a waiver of the 10 percent penalty for those younger than 59 ½, the ability to recognize the distribution as taxable income over a three-year period, and the opportunity to repay the distribution.
4. Employer Contributions
Employers may decide not to make discretionary contributions for 2020 but be restricted in their ability to suspend or reduce promised contributions, both Safe Harbor and non-Safe Harbor. Again, Third Party Administrators can assist employers in understanding their plan’s provisions and regulatory requirements.
A Safe Harbor plan may be suspended mid-year if the safe harbor notice stated it reserved the right to do so, or if the employer experiences an “economic loss” meeting certain definitions. Notice to participants, a plan amendment and continued Safe Harbor contributions for 30 days would be required, and participant deferrals for the entire year would be considered in discrimination testing. Similar actions would be required to suspend or reduce a promised non-Safe Harbor contribution.
Sponsors should be aware that they cannot suspend contributions indefinitely as this could result in full vesting of all past employer contributions.
5. Avoiding Plan Termination
Employers contemplating lay-offs should be aware that involuntary termination of more than 20 percent of participants can cause a “partial” plan termination, resulting in full vesting of employer contributions for all participants.
Also, employers seeking to end contributions by terminating their plan should understand that this, too, results in full vesting for all participants and distribution of all plan assets. Furthermore, employers cannot launch a new 401(k) plan to benefit the same participants for 12 months following termination.
Employers who change any aspect of employee pay should consider their plan’s definition of compensation. Increases in taxable fringe benefits, for example, could result in required deferrals. Third Party Administrators can advise sponsors on compensation to avoid compliance issues.
As part of the COVID-19 relief, the CARES Act waives the requirement for participants to take April 2020 Required Minimum Distributions. The 2020 calculations were based on December 31, 2019 account values, which this year would result in a higher-than-normal percentage of a participant’s assets being distributed.
This blog is written to help makes the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans. Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan and hence cannot be a guarantee against fiduciary breach.