Allison Brecher is the General Counsel & Chief Privacy Officer at Vestwell, a digital retirement platform. Allison leads the legal and compliance program for all of Vestwell’s operations, as well as all privacy-related matters. Allison has focused her practice on ERISA, employee benefits, and data privacy for more than twenty years.
- When is it the right time to dive into your 401k? With so much uncertainty people must be considering it. What should they keep in mind?
The most common answer is that the right time to withdraw funds from your 401(k) is when you are already retired. That being said, we realize that a 401(k) might be a necessary source of immediate funds for anyone whose health or employment has been affected by COVID-19.
Should you find yourself in a time sensitive need for income, there are a number of options as they pertain to your 401(k) as well as various points to consider before making any emotional decisions. We anticipate loans and distributions to become the most widely adopted, especially since the CARES Act has opened up a number of provisions that favor employees. Companies are now able to amend their plans to allow for these COVID-related loans and distributions, but it’s important to note that they don’t come without consequence. With a loan, for example, participants can now take out the lesser of up to $100,000 or the vested present value of their account and repayment can be delayed up to a year for loans requested by September 23. However, if the participant leaves his or her job before the repayment period, s/he may be required to repay the loan in full immediately. That can be quite risky in today’s uncertain job market. With distributions, on the other hand, participants can take up to $100,000 with the 10% early withdrawal penalty waived, and they can repay the distribution back into their plan so they’re not locking in losses. However, you are still pulling those funds out while the investments in the plan are at a low value, and potentially paying them back at a higher one so the repayment back into the plan may not go as far.
- There are a lot of layoffs happening. How does this affect someone’s retirement plan? Can you take your 401k with you to a new job?
It is quite unfortunate the toll we’re seeing on the national employment numbers, especially since the demand still exists across many industries. However, the good news for employees is that any vested funds in your 401(k) are yours and yours to keep. In fact, while your company selects the plan provider(s) to administer and custody your funds, you can keep that money with the same provider in perpetuity if the plan allows it. It is fairly common for plans to require a $5,000 minimum balance. Alternatively, you can roll that money into a traditional or Roth IRA without penalty.
- How have your participants reacted to the current crisis?
In the weeks after the pandemic hit, our participant inbound volume increased by over 50%. Most individuals were asking about changing deferral rates, investment strategies (specifically to more conservative investments), and how to access money should they need it. However, what we’ve found is that much of this was information gathering, and we’ve seen no meaningful adjustment to investment strategies, deferral amounts, or the number of loans, distributions, or hardships taken during this time. Even if a participant loses his/her job or is furloughed, unemployment or workshare benefits in some states have been enhanced and individuals may find no need to tap into their retirement savings to cover near-term expenses. Things may change now that the CARES Act has passed, but it seems as though many participants are staying the course. We continue to keep Vestwell users updated on COVID-19-related legislation, product enhancements, and resources so they can continue to make informed decisions as it relates to their retirement savings.
- What do you recommend individuals do regarding retirement and investing in their 401K during this pandemic? Should we wait it out? Should we double down and invest more?
Most of us lived through the market downturns in 2001 and 2008 and experienced the rebound. So while we’re seeing a heightened sense of concern from our clients, we view the best practice for the COVID-19 induced downturn as no different than the past has indicated – in increased times of market volatility and uncertainty, the best advice is to stay the course especially for investors who have at least ten years to go before reaching retirement age. Continue contributing to your 401(k), don’t take out unnecessary loans or prematurely liquidate, and more importantly, leverage your financial advisor or company plan advisor if you’re unsure of how to respond to current market conditions.
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