Almost overnight we’ve moved from learning about the retirement-related provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to acting on it. It’s early yet, but this week we asked about what you’re hearing—and how your plan sponsor clients are responding to the new options.
Of course, under the provisions of the CARES Act an individual is eligible for a Coronavirus-related distribution if she/he (or her/his spouse or dependent) is diagnosed with the virus (via a test approved by the Centers for Disease Control), or experiences adverse financial consequences as a result of quarantine, furlough, layoff, reduction in hours, inability to work due to childcare, business closure, or other factors as determined by the Secretary of the Treasury. Plan sponsors are allowed to rely on the participant’s claim of eligibility without verifying.
Adoption ‘Rates’
While it’s still early, we asked readers which provision(s) they expected their plan sponsor clients, generally speaking, to adopt. While a wide variety of responses were available, suffice it to say that there were certain aggregation points, and a clear plurality of readers thought that most of their plan sponsor clients would embrace certain features.
50% - thought most of their plan sponsor clients would allow for the suspension of loan payments due on or before Dec. 31, 2020 and defer those payments for up to one year. Nearly 18% thought that all of their clients would embrace this, while roughly a quarter (23.53%) said “some” would.
49.71% - thought that most of their plan sponsor clients would allow repayment of coronavirus-related distributions during the next three years. Just under a quarter (24%) thought all would, while 15% saw “some” of their clients getting on board with this option.
48.82% - were of the opinion that most of their plan sponsor clients would allow distributions until Dec. 31, 2020 of the lesser of 100% of the vested account balance or $100,000. About 18% (17.65%) thought all of their clients would adopt the provision, while 21.76% thought that “some” of their plan sponsor clients would do so.
39.77% - thought most would adopt the option to increase plan loan limit to the greater of $100,000 or 100% of the vested account balance for loans initiated within 180 days of enactment (roughly one-in-ten thought that all would adopt this provision, though roughly 30% said only some would, and 14% put that at “a few”).
Reader Recommendations
As for their recommendations to their clients, readers ranked them as follows:
77.38% - Allow distributions until Dec. 31, 2020 of the lesser of 100% of the vested account balance or $100,000.
76.19% - Suspend loan payments due on or before Dec. 31, 2020 and defer those payments for up to one year.
74.40% - Allow repayment of coronavirus-related distributions during the next three years.
54.19% - Increase plan loan limit to the greater of $100,000 or 100% of the vested account balance for loans initiated within 180 days of enactment (on or before Sept. 21, 2020).
Comment ‘Airings’
Now, as you might expect we got a LOT of comments on this topic. Here’s a sampling:
It’s a work in progress and changing every day. I think plan sponsors are just trying to keep their businesses going right now.
It’s such a difficult and uncertain time. Employees are in need of as much support as they can get from their employer therefore the employer needs to allow their employees access to their funds. It doesn’t cost the employer which is most important for businesses right now.
We aren’t making recommendations since businesses are affected in so many different ways.
None of the above - taking a wait and see approach. Feel it is too early to allow for these options to be available.
Most clients feel if they DON’T adopt these provisions it would be “bad publicity.”
We haven’t had a lot of demand for the suspension of loan repayments yet so that hasn’t been a pressing addition for my clients thus far. There is a lot of concern on how those loans will be administered during the suspension from the clients I have talked to.
We try to discourage loan policies in our plans but we still have about half of our plans that have loan policies. We are in the Midwest in smaller towns so I am still of the belief that we won’t be hit as hard as bigger cities. If necessary for the plans without loan policies I would rather see them stay that way and opt in for the penalty free distribution.
It starts with a strategic discussion about the goals of the fiduciaries. Most are totally willing to add new loans and new distributions, but are unwilling to touch the existing loan payment schedule or enhance in-service distributions beyond the special $100K.
I am tailoring my recommendations very specifically based on the plan sponsor’s needs. Most of my clients are still working full time, which lessens the need for help. Other clients are waiting a few weeks to decide. I have no qualms about recommending any of the solutions if they fit the situation/needs. I will comment that many of the recordkeepers are all/nothing. They are not allowing plan sponsors to pick and choose elements, which has complicated the decision making.
Our recommendations depend on the documented participant needs of our clients. Unless there is a serious need we would recommend that the retirement funds of a plan participant not be invaded. Making it easy to withdraw retirement funds does not serve plan participants. We serve a State that has not been hit hard so far by the Corona Virus.
We are advocating for a wait and see approach - do not offer retirement savings right now unless the company itself is laying off/furloughing etc. employees. Offer later if the need arises.
I can see why not offering these has merit, as they are counter-intuitive to everything we preach. I do understand why some people will need these provisions and I wouldn’t want to deprive someone in need. I’m petrified that this will become a free-for-all cash-grab because of how relaxed the requirements are on who can access these new loans & distributions.
Not recommending any of the options. I explain each and help plan sponsor decide. Most sponsors are electing not to add them, if given the choice.
(Additional comments are online at https://www.napa-net.org/cares-reader-poll-additional-comments)
Provider Perspectives
While the adoption of these provisions is optional a number of recordkeepers/TPAs have, and are already, reaching out to plan sponsors on decisions regarding the optional provisions of the CARES Act, notably COVOID-19 related distribution and loan options. Realizing that readers often work with a variety of recordkeepers, we asked what most were doing.
39%- It’s split about 50/50 between those assuming adoption, and those waiting for instruction.
33%- Default the plan to incorporate all coronavirus-eligible provisions of the CARES Act unless the plan sponsor opts out.
15%- Status quo until the plan sponsor directs as to which provision(s) of the CARES Act they will adopt, if any.
11%- Most are waiting for direction.
2%- Most are assuming adoption.
We got a number of reader responses to these approaches—most expressing concern about the default in, and the timing to decide to opt out. Here’s a sampling:
We are not in favor of auto adoption. Our sense is that is the easiest way for large service providers to not have to talk to each sponsor. We see it as an opportunity for consultation.
Some are being very aggressive about making this available on an opt-out basis, which is interesting, as some see this as a fiduciary act.
It’s been concerning that a lot of recordkeepers are putting the “cart in front of the horse” on this. One notified clients a day before they had to opt out. I agree that it’s great for individuals that are affected, however, I think it will be abused. I’ve also had multiple recordkeepers flip their initial stance. So it’s been a mess.
Some TPA’s have been very good about communicating the changes (w/in 3 days of the CARES Act Approval) and provided a 2 page template w/ adoption signatures for each provision. Others have been very slow to communicate (on a Saturday) and defaulted plans unless they opt out. I don’t like the auto default option, while cumbersome, it’s laziness.
It is absolutely appalling. In the rush to write checks, many recordkeepers didn’t let the fiduciaries make decisions about critical plan features, give proper consideration as to what is in the best interest of the participants, didn’t create proper plan communication materials, and mostly pretended like the voluntary adoption of drastic new measures was somehow a new, immediate requirement. I guess it is easier for them to write checks than to tell participants that the Plan does not yet offer such features. There are some plan sponsors who are on furlough or limited duty the one day that they needed to opt out, but might feel that turning the Plan into a slush fund is not a desired fiduciary act. Recordkeepers are not supposed to make fiduciary decisions, but in effect, they did.
The few that have went with an “opt out” approach have set very limited time frames for sponsors to opt out. The limited window has been perceived very negatively by our plan sponsors and forced them into haste decisions. The opt in approach allows for a much more thoughtful and employer by employer decision making process.
Most of the opt-outs have already occurred and in record time, leaving NO time for sponsors to receive, digest and actually approve. Easier for provider, but definitely not allowing for good governance and decisions by sponsors.
This is wrong! The default should be NO, or not incorporating the CARES Act changes, as they are not required. Plans should have to opt in, and many clients have decided not to incorporate the changes, which means we have to fill out a bunch of paperwork to opt out of it!
Recordkeepers are handling this differently - opt in and opt out. Communicating to our clients has been a lot of work and getting a vote from the Plan Committee so we have documentation on their decision on whether or not to add the provisions is extra work for us but a best practice.
You can check out additional reader comments at https://www.napa-net.org/cares-act-additional-provider-comments
Other Comments
We got so many thoughtful responses this week—and so many insightful comments. In addition to what we’ve shared thus far, here are some additional comments:
Investment recordkeeper responses to the crisis has been interesting to digest. Some are clearly doing what is easiest for them to integrate these new, optional provisions without regard for plan sponsor and intermediary input. While others are allowing for engagement with trusted advisors and plan fiduciaries before making unilateral decisions that have significant fiduciary and operational responsibilities attached. We certainly appreciate and prefer the latter.
The virus has halted a lot of plan improvements and proactive strategy with my clients due to the retirement plan provisions of the CARES Act. I’ve been working more as an informational source for my clients and their employees right now. Hoping the shift will come soon to continue to improve my clients retirement plans.
Overall we have seen many clients impacted although most are working through the PPP loan process. We sense we may be on the downhill side of COVID-19 impact and should see improved conditions over the next few weeks-months.
Since each recordkeeper and TPA is determining their own default, the challenge for advisors like me is having to learn each one and communicate that with plan sponsors.
I hope we don’t overreact, and wisdom prevails in terms of how long the economy is shut down. I fear that one of the political parties would have the economy shut down through November just to have an effect on the elections. To them politics is more important than what is in the best interest of our Nation and in particular our economy.
Thank you for ARA stepping up and providing communication pieces. Recordkeepers provide recordkeeper specific / branded pieces and it is nice to have a neutral party provide communication.
You can check out other final reader comments at https://www.napa-net.org/cares-act-reader-poll-final-comments
In addition to the great insights and perspectives, just wanted to say “thank you” for all you’re doing, and all that you’ll be doing in the weeks ahead. Oh, and a special thank you to all who left personal notes and comments. They’re all read—and VERY much appreciated!
