Retirement savings challenges are derailing many workers amidst the Covid-19 pandemic. The resulting economic crisis is taking a toll. The retirement savings challenges last year disrupted many employees’ ability to build their retirement balances. Fortunately, a single year cannot spell disaster for retirement savings – so long as it does not become a pattern that persists for many years.
According to a recent BenefitsPro article, 2020 challenged 401(k) metrics like no other plan years has. Specifically, the following came under attack:
- Participation rates: Measuring plan usage and success is one of the top retirement savings challenges during the pandemic. Furloughs, lay-offs, and reduced work hours caused plan participation rates to come under fire. Under these conditions, employees are less likely to direct a portion of their income to retirement savings. Participation rates among younger workers were hit particularly hard during 2020.
- Deferral rates: Employer matching contributions are key to incentivizing workers to increase their retirement plan contributions. Due to the pandemic, however, many employers were forced to reduce or suspend their matching contributions in 2020.
- Account balances: As could have been predicted, one of the 2020 retirement savings challenges arose out of the allowances for early withdrawals. Retirement plans were permitted flexibility to make withdrawals from 401(k)s under the CARES Act. This resulted in reduced retirement savings balances.
So how can plan sponsors help get their employees’ retirement savings back on track in 2021? BenefitsPro had the following recommendations:
- Restore, or boost, deferrals: Staying at home meant many people reduced their spending in 2020. Encourage employees to use that extra cash flow to bolster their retirement savings.
- Repay CARES Act withdrawals: Under the CARES Act, employees could withdraw up to $100,000 from their retirement savings. This could be done without paying the 10% tax penalty. However, the tax liability on these withdrawals is still due. Unless of course, they are repaid within three years. Employers can use the avoidance of that tax liability to incentivize employees to repay their withdrawals early.
- Revisit progress toward their savings goals: Employees should periodically revisit their retirement savings to see if they are on track.
BenefitsPro also pointed out that 2020 provides an opportunity to reinforce important lessons about saving for retirement. One can expect there to be setbacks along the way and stay the course with a long-term strategy. As such, employers should encourage employees to boost their deferrals. Employees should plan to get ahead when they can. That way, they are better able to weather inevitable setbacks. And 2020 also served as a reminder that investors can miss out on opportunities if they panic! It is always worry-some when participants exit the equity markets. Consider the long-haul to retirement. Consider not getting out of the market in a downturn rather than focusing on their long-term goals.
Although 2020 brought with it unprecedented challenges, it also provided a solid opportunity. Employers can reduce retirement savings challenges and improve retirement plan metrics. Retirement savings challenges need to be met head-on, by encouraging employees to save more for their retirement in 2021 and beyond.
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