More 401(k) Plans Are Liberalizing Rules Than Cutting Benefits: Survey
The COVID-19 crisis underpins these changes, many reflecting relaxed rules under the CARES Act.
While many employers are making it easier for 401(k) participants to access emergency funds during the COVID-19 pandemic, courtesy of the Coronavirus Aid, Relief and Economic Security (CARES) Act, some have also eliminated their 401(k) matching contributions or expect to do so sometime this year.
Those are just some of the major findings from a COVID-19 benefits survey released by Willis Towers Watson, a global advisory, risk management and insurance brokerage firm. A total 816 companies, employing 12 million workers, participated in the survey.
Under the CARES Act, employers can allow hardship distributions from 401(k) plans up to $100,000 that are not subject to the usual 10% early distribution penalty (for those under 59 ½), or the 20% mandatory tax withholding, through the end of this year. Taxes due on the distributions can be spread over three years.
DC plans can also allow larger loans from plans made between March 27 and Sept. 23. Under the CARES Act, loans can equal the full vested balance (up from 50% previously) or $100,000, whichever is less, and repayments can be delayed for one year, although interest continues to accrue.
In addition, required minimum distributions from defined contribution plans can be waived for the rest of 2020, as they are for other retirement accounts.
All of these temporary rule changes contained in the CARES Act are voluntary. DC plans don’t have to adopt them but if they do, participants can take advantage of them by simply self-certifying that either they or a family member has been infected with COVID-19 or they are experiencing a financial burden due to the pandemic, such as a job layoff or cut in pay or the inability to work due to day child care issues.
The Willis Towers Watson survey found that 65% of respondents have adopted the increased access to plan distributions while another 16% are planning to do so or considering it this year.
Almost as many (64%%) are allowing deferred loan repayments while close to half have increased the maximum allowable loan amount and 17% are either planning or considering making adjustments to their DC plan loan policies.
“These are difficult times emotionally and financially for many employees,” said Robyn Credico, North America Defined Contribution practice leader, Willis Towers Watson, in a statement. “Making cash available from defined contribution plans is an easy, relatively inexpensive way to provide much needed assistance to employees.”
Defined contribution plans are not just liberalizing plan rules; some are also reducing plan benefits. Twelve percent of employers surveyed have suspended matching contributions in their plans and 23% are planning or considering doing so this year, according to the Willis Towers Watson survey.
Not surprisingly, “significantly more companies in hard-hit industries, including retail and business services, “ have made these cost-cutting changes, according to the survey. One-quarter of companies in those industries have suspended their matching contributions while nearly a third (32%) have decided to do so this year, or are considering it, according to the survey.
“The more distressed companies cut contributions to their plans in an effort to reduce costs, similar to what we saw during the financial crisis of 2008,” Credico said.
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