Recent market reaction over the coronavirus is understandable, given the tragic loss of human life, the spread of the disease beyond mainland China, and concerns about its impact on the global economy. This type of unpredictability is not something that we have experienced in recent years and as a matter of perspective, the last few years have been some of the least volatile in our nation's history.
As employers and HR managers, you may be hearing from your employees with questions and concerns about their investments in the company retirement plan. These are reasonable questions, and it is natural to want to do something in reaction to the markets. However, in times like this, it is essential that you encourage your employees to rely on the professionals, trust the process, and remove emotional reactions from the situation.
Here are a few ways to help employees navigate through the market uncertainly that has developed as a result of the COVID-19 pandemic:
Reach out to a professional
The financial advisor(s) that work on the company's plan should make themselves available for one-on-one support for employees over the phone through a video feed. Enlist their expertise and ask for their support handling inquiries from your employees.
Providing access to financial education and advice for your employees is critical in building an exceptional workforce but also in providing stability during these uncertain times. Financial advisors understand specific situations and reasons for investing. They can also answer questions and provide regular guidance to employees, helping them understand the importance of planning for the long-term and not reacting to headlines.
Encourage employees to maintain automatic contributions
If possible, and the employee's financial situation allows, now is a good time for employees to use this volatility to their advantage and continue to dollar-cost average purchase the same investments as they had previously, but at lower prices.
It is recommended that employees contribute to their retirement accounts regularly and take advantage of automation. The habit of investing is essential for long-term success, but it also reduces the likelihood of regular changes based on monthly cash flow. Based on the nature of this situation, people may need added cash flow. Still, to the full extent possible, it is beneficial for the long-term success of the employee to maintain their current contributions.
Know the rules of your retirement plan
Depending on the industry and impact the coronavirus may have, it is important that employers know the details of their retirement plan and determine if there is flexibility in terms of loans or hardships. Plan advisors can provide additional insight into potential provisions and help define the process if employees are requesting these tools.
Some retirement plans include the ability for employees to request hardship withdrawals, so it is in the best interest of the employer to determine if that is an option within the current retirement plan, as employees may look to explore those options during times of economic uncertainty.
401(k) loans are an additional option that some employees may wish to explore. Borrowing against a retirement plan is typically not recommended as the action is accompanied by fees or interest. 401(k) loans must be repaid-with interest to avoid penalties, and funds obtained through a hardship withdrawal will be taxed.
Under the IRS safe harbor, hardship withdrawals may only be made for certain categories of enumerated expenses and, therefore, cannot be made solely as a result of a reduction of hours or a furlough. Expenses that traditionally qualify for hardship withdrawals include:
- Certain medical expenses
- Home-buying expenses for a principal residence
- Up to 12 months' worth of tuition and fees
- Expenses to prevent being foreclosed on or evicted
- Burial or funeral expenses
- Certain expenses to repair casualty losses to a principal residence (such as losses from fires, earthquakes, or floods)
Provisions will vary based on the plan, and it is important to reach out to the retirement plan contact or financial advisor to gain a full understanding of the rules, process and answers to commonly asked employee questions.
With so much uncertainty on how widespread the impact of the coronavirus will be, the focus for retirement planning will continue to be to build plans, processes and lines of communications to ensure that all parties have the insights they need to make informed and rational decisions about their investments. By partnering with a financial advisor, businesses can reap the benefits of a financially healthy workforce that will be prepared to weather the next season of volatility.
For more information on the important steps businesses should take during this uncertain time, visit our OneDigital Coronavirus Advisory Hub, or reach out to your local OneDigital advisory team.
Investment advice provided by Resources Investment Advisors, LLC, an SEC-registered investment adviser and subsidiary of OneDigital.