Like the housing bubble break, the coronavirus outbreak (COVID-19) is another challenge for us all. As a 401k-plan sponsor, bad news might be worrying you. This article is all about why you shouldn’t panic and what you should consider if markets remain volatile.
The virus that’s causing markets to correct (meltdown) is part of a pattern in effect since 1929.
Will COVID-19 be a worse bear market than the 2008 crisis that put the entire financial sector at risk?
Time will tell. The lesson is that while the stock market is one of the best investments over the long term, volatility creates massive corrections. Anyone can handle things when the market is up; it’s how you deal with adversity as a 401k-plan sponsor that’s more important.
Don’t panic
The worse thing any 401k-plan participant can do in times like these is selling every equity position they have to flee to fixed income positions.
It’s idiotic because they effectively lock in their losses. As a 401k-plan sponsor, you can’t afford to panic. Unlike your plan participants, you’re a fiduciary and responsible for the retirement assets of your employees.
Any kneejerk decisions you make concerning the plan may come back to haunt you. It isn’t a time to decide to eliminate all equity mutual funds from your plan and it certainly isn’t a time to terminate your plan altogether.
Like the folks buying too much toilet paper, this isn’t the time for rash decisions that will hurt you long term. Panicking now does nobody any good and as a responsible plan fiduciary, you can’t afford to embrace the hysteria.
Think long-term
Retirement savings is a marathon, not a sprint.
Unless you’re within three years from retirement, you have to take a long-term view. While we don’t know how long the virus will impact our economy, the reason the plan was started was for long term retirement savings.
This is a small pothole on the road to retirement savings, so understand that it shouldn’t deter you from continuing the plan. It’s an employee benefit that’s used to recruit and retain employees. Trust the process and keep in mind that there are hiccups along the way.
Call your advisor, don’t give advice
You have a financial expert to help your 401k plan, so contact them. It’s quite possible that your advisor already reached out to you with stock-market commentary, BUT the worst thing you can do as a 401k-plan sponsor is attempt to give financial advice to your own plan participants.
When the housing bubble burst in 2008, a fellow law firm employee told me he put in 100% of his 401k assets in a midcap fund because it’s the middle of the market. I kept my mouth shut. Giving financial advice to participants is a fiduciary liability to be avoided, so reach out to your advisor if they haven’t reached out to you.
Contact your TPA
It might also be a time to consider contacting your third-party administrator (TPA). If participants stop deferring and they’re not considered highly compensated employees, this might negatively impact your compliance testing if your plan isn’t a safe harbor 401k.
Even if there’s nothing that affects your plan’s day-to-day administration, there’s nothing wrong with touching base with your TPA to see if you need to know anything new in your role as a 401k-plan sponsor and fiduciary.
Communicate with plan participants
Communication is key and one of the major problems I had as an employee was that I didn’t hear from my employer when I thought I needed to.
In volatile times, it’s best to work with your plan providers in developing communications with your participants. You might not be able to fix what’s wrong, but a reassuring word from you and your plan providers can help your employees with market anxiety.
Letting participants know about the history of the markets, and basic concepts like dollar-cost averaging can go a long way in alleviating the fear and the hype. Ensure participants get regularly-scheduled investment education/enrollment they’re entitled to.
Can you afford those mandatory contributions?
If your 401k plan has required contributions such as a safe harbor, stated matching contribution or you have another retirement plan with minimum funding requirements (defined benefit/cash balance/target benefit/money purchase), now is the time to consider whether or not you can afford these contributions.
Thanks to accrual requirements with many of these contributions, realizing that you can’t afford a contribution in December isn’t going to help you avoid that mandated contribution.
As a plan sponsor, you have a lot more leeway in perhaps freezing or eliminating these types of contributions if you figure it out before June 1.
Coronavirus won’t get you out of your fiduciary duty
While we seem to have some sort of daily change thanks to the coronavirus, you still have to prudently fulfill your fiduciary duty as a 401k sponsor, barring any guidance from the Internal Revenue Service and/or Department of Labor to the contrary.
You must still deposit salary deferrals as quickly as possible, administer the plan according to its terms, making sure you only pay reasonable plan expenses and esuring that participants who direct their investments get the information they need to make informed decisions.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
He is also the host of That 401(k) Conference, a series of fun and informative retirement plan conferences taking place in various cities throughout the year.
Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.
Ary Rosenbaum is an author and ERISA/retirement plan attorney for his firm, The Rosenbaum Law Firm P.C.
He is also the host of That 401(k) Conference, a fun and informative retirement plan conference taking place at Dodger Stadium in Los Angeles on Friday, February 22, 2019, from 9:00 am to 2:00 pm. Special guest: Steve Garvey.
Rosenbaum’s latest book, humbly titled “The Greatest 401(k) Book Sequel Ever,” is available in Kindle and paperback at Amazon.com.
