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How to Determine If You Should Change Your Retirement Plan Match and Navigating Loan Distribution Requests

We are currently experiencing unprecedented times that are presenting many challenges. As an employer, you are likely making difficult decisions about the future of your business and the best ways to be safe, continue operations and support your workforce.

Similarly, individuals are facing the difficult challenges of maintaining their family balance sheets that may be dramatically changing due to layoffs or increasing costs for things such as health or childcare.

It is easy in a volatile time like this to discount the importance of saving for the future and focus on immediate needs. But it is also important to remember that our actions in times like this will help to dictate future outcomes.

ONEDIGITAL INSIGHT ▼

Employee benefits costs are qualified as “payroll costs” under the Paycheck Protection Program (PPP) and changes made to benefits plan design may impact the amount of relief an employer might receive. Consult with your OneDigital advisor to determine the best course of action for your business.

ONEDIGITAL INSIGHT ▼

Employee benefits costs are qualified as “payroll costs” under the Paycheck Protection Program (PPP) and changes made to benefits plan design may impact the amount of relief an employer might receive. Consult with your OneDigital advisor to determine the best course of action for your business.

ONEDIGITAL INSIGHT ▼

Employee benefits costs are qualified as “payroll costs” under the Paycheck Protection Program (PPP) and changes made to benefits plan design may impact the amount of relief an employer might receive. Consult with your OneDigital advisor to determine the best course of action for your business.

Here are two questions that may be top of mind regarding your retirement plan during this time:

  1. Should I change how my retirement plan is structured to cut costs?

    No matter your outlook on this current situation, I can say without hesitation that retirement plans play a critical role in helping employees save for the future. The regular and automatic habit of contributing and investing starting at an early age, by and large, creates better retirement outcomes.

  2. I cannot speak directly to a unique business’s financial situation and immediate cash-flow challenges. However, generally companies are better off when employees can retire when the time is right and when they can work without distraction or money-related stress.

    There are many hard costs to consider but please also consider your answers to these questions:

    • What are the less quantifiable impacts to your workforce in the longer term?
    • What is the message that you are sending to your employees about the importance of saving?
    • Are your employees more likely to change or stop their regular contributions as a result or your actions?

    Again, the decision to change a plan to reflect to a new/current situation is up to the employee. I would encourage employees to fully investigate the impact of changes on plan costs with a trusted financial advisor.

  3. What do I tell my employees who want to take loans or distributions?
  4. As a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a plan may have updated to include increased plan loan limits and Coronavirus Related Distributions (CRDs). While these options now exist, it is important that employees fully understand the impacts of their decision to borrow or remove funds from their retirement account. When making the decision to borrow from a retirement plan, employees should consider:

    • The Cost of Repayment
      The cost of borrowing from a retirement plan may seem low, but employees should consider that they’ll be paying themselves back with after-tax dollars. For example; If they are in the 24% tax bracket, every $1 they earn to repay their loan leaves them with only 76 cents for that purpose. The rest goes to income tax.
    • The Opportunity Costs
      Any funds that are withdrawn from an account will not be generating investment returns. This means that the cost of the loan is also the equivalent of missed total returns, and this could impact their ability to save enough for retirement. Additionally, taking money out when there is a decrease in value can lock in the losses, and employees may not get the potential returns as the market regains its value. 
    • Impact of Job Loss or Job Change
      If an employee loses their job or leaves a company, they will be forced to come up with the outstanding balance in less time. If they can't repay the money, the loan will be treated as a withdrawal, including implications of paying income tax and penalties.
    • Employees should consult with their financial advisor or record keeper to understand the specific rules of their plan. This would also be an excellent opportunity for them to provide one-on-one financial counseling for your employees if this is a service that they offer.

      When Taking a Distribution

      Are they on track for retirement?
      Providing regular financial education for your employees is a good idea because it keeps employees focused on how much they should have saved at each age.

      Here are some general guidelines for what individuals should have saved based only on their age:

      Age Savings
      By age 35 2 x annual salary
      By age 40 3 x annual salary
      By age 50 5 x annual salary
      By age 60 7 x annual salary
      By age 65 8 x annual salary

      Saving in a retirement plan regularly over a long period gives employees the benefits of compounding interest, meaning the ability to generate investment returns by investing in previous returns. Taking distributions from a plan, especially when younger, can substantially impact how much they will be able to save for retirement.

As a financial advisor, the core of my job is to help people think long-term. To help them visualize what they would like their future to look like and what actions they can take now to make those dreams for the future a reality. As you consider changes to your retirement plan and help employees navigate new challenges, please do not discount the importance of keep retirement savings intact.

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 advisory team.

Investment advice provided by Resources Investment Advisors, LLC, an SEC-registered investment adviser and subsidiary of OneDigital.

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