Encouraging Plan Participation During the Pandemic

Posted on in category News Update

The coronavirus pandemic has significantly impacted many from a health and/or financial perspective, and caused some retirement plan participants to evaluate their engagements in retirement plans. Recent stock market volatility, resulting from economic pressures prompted by business shutdowns across the country, has also contributed to investor uneasiness. Participants may be asking:

  • Am I invested in the right investments?
  • If my retirement plan account balance has decreased due to market volatility, why should I continue to invest?
  • Should I withdraw money to cover current expenses? After all, the CARES Act makes it easier…

With these types of questions in mind, now is a good time to make sure participants have all the information they need to gain perspective and stay the course with their retirement plans. Alliance Benefit Group Southwest (“ABG” or “ABG Southwest”) is available to help. We understand that more communication during this time is key, rather than less.

Remind Participants – It’s Time in the Market, Not Timing

Retirement wealth is not built overnight; it’s built gradually and over time.

Markets will rise and fall, but the key is to stay invested regardless of the current scenario.

If participants try to time the market, they may miss out on the best opportunities. For example, the chart below illustrates the negative impact of market timing on a $10,000 investment in the S&P 500 Index, a broad based index of 500 of the largest companies in the U.S by market value.

  • Over the past 20 years, $10,000 invested in the S&P 500 Index grew to over $32,000.
  • However, if a participant missed the 10 best days of market performance over that time frame, their investment would be approximately half that amount.
  • If they missed the 20 best days, their investment was even more impacted.

The bottom line is that, in an investment allocation suitable for a participant’s goal and risk tolerance, continuous investing over time reaps the greatest benefit.

Encourage Participants to Avoid Paying the Present by Borrowing from the Future

Under the CARES Act, employees under 591/2 years old can withdraw up to $100,000 from their retirement plan accounts without paying the 10% early withdrawal penalty. However, doing so could lead to longer-term financial challenges:

  • By selling investments, participants effectively “lock-in” investment losses they may have experienced in 2020, as well as forgoing any potential gains as the market recovers.
  • If participants stop contributions, they may miss out on the matching contributions they may receive from the employer.

Participants need to view retirement plan withdrawals as their option of last resort.

A retirement plan is not a savings account, but rather a financial foundation for the future.

Consider ABG Your Resource

Your plan participants may have questions about the issues covered in this article as well as other retirement plan concerns. At ABG, we are here to help. We have found that video meetings, webinars, online resources, and conference calls work effectively for a variety of scenarios when in-person meetings with plan sponsors and participants are not possible. Contact your local ABG representative with any questions you may have, or fill out our contact form to be put in touch.

Challenging times require making tough decisions, quickly. You can count on us to keep you briefed on new funding sources, compliance updates, planning resources and more essential updates regarding the COVID-19 crisis. Access REDW’s COVID-19 Resource Hub.