Earlier this year as businesses and consumers alike started to feel the economic effects of the COVID-19 pandemic, there was a great deal of speculation as to whether companies would put a hold on 401(k) matches. Fortunately, according to a recent survey by the Plan Sponsor Council of America (PCSA), more than 90% of employers will make their retirement plan contributions this year. Unfortunately, smaller companies are more likely to have suspended or reduced plan contributions in the wake of the COVID-19 pandemic.

You can read more about the PCSA survey in this recent 401(k) Specialist article (below).

The Toll on Small Business Retirement Savings from COVID-19

In contrast to the response during the 2008-2009 financial crisis, more than 90% of employers will make their retirement plan contributions this year, though smaller organizations are more likely to have suspended or reduced plan contributions in the wake of the COVID-19 pandemic.

According to PSCA’s latest snapshot survey of retirement plan sponsors, most companies are not making changes to plan contributions this year, but smaller organizations have clearly been more impacted by current conditions and are thus more likely to have suspended or reduced plan contributions.

More than one-in-ten (11.5%) plans with fewer than 50 participants have made changes to the matching contribution—more than three times the number of organizations with 5,000 or more participants.

COVID versus the Great Recession

“We often are asked how companies are responding to current economic condi­tions as compared to the financial crisis of 2008/2009 – the short answer is that, over a somewhat longer time horizon, 4 times as many employers suspended or reduced the match than compared to now,” Hattie Greenan, research director for PSCA, part of the American Retirement Association, said in a statement. “Where their retirement plans are concerned, employers’ responses to current conditions seems more measured than in 08/09 – we may be seeing the impact of lessons learned.”

In 2008 companies that suspended their matching contributions experienced a decrease in plan participation to a much greater degree (72.9% of companies) than those that did not change their matching contribution (14.4% of companies), as well as a decrease in participant deferral rates.

“I think many went into this period expecting it wouldn’t last all that long, likely muting the potential impact on retirement savings,” Nevin Adams, chief content officer and head of research for the American Retirement Association, added. “Since then, there have been other mitigating factors, such as the recent broad-based government assistance in the form of the Payroll Protection Program, and that has almost certainly helped as well.”

COVID-related plan designs

Most responding organizations implemented at least one of the optional provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, designed to help relieve the economic impact felt by participants as a result of the COVID-19 pandemic.

More than half of the responding plans are allowing coronavirus-related distributions (CRDs), and nearly a third are allowing increased plan loan amounts.

Half of plans are allowing participants to pause the paydown of existing loans that are due through December 1, 2020, and defer payments for up to a year, though this is significantly more common at large companies (73.3% of plans) versus smaller ones (23.1%).

Participant response

While most organi­zations have still not noted an increase in plan loans or withdrawals this year, more are noting an increase now than in June, as the economic impact of the pandemic continues, and the Payroll Protection Program and unemployment benefits lapse. A quarter of plan sponsors now indicate an increase in plan loans, up from 13% five months ago, while nearly 40% of plans noted an increase in withdrawals.

“Ironically, knowing that they could access those retirement funds in an emergency may well have tempered actual withdrawals to date, though we’re not out of those woods just yet,” Adams said.  “Quick Congressional action in the form of the CARES Act clearly played an important role in helping provide reassurance during a critical period.”

While employers have largely remained resilient in the commitment to retirement plan contributions in 2020, the economic impact of the pandemic continues to reverberate, and small business owners still desperately are looking for some legislative relief on contribution timing. If only 10% of the roughly 600,000 employers suspended or reduced their contributions, the long-term impact on retirement security would be significant.

Fortunately, employers are appreciative of this impact.  As one respondent noted, “Good retirement plans for our employees is a forever need.”

This article was originally published in 401(k) Specialist on December 8th, 2020.

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