Portfolio Management

Not All Early Withdrawals Are Consequence-Free

How advisors can get employees back on track

by Joel Mee

Mr. Mee is Senior Director of Retirement Plans at The Standard. Visit www.standard.com.

The CARES Act, a piece of legislation connected to the COVID-19 stimulus package passed by the U.S. government back in March, was created to assist those experiencing financial hardship due to the pandemic. With the removal of the penalties that often dissuade participants from borrowing or withdrawing their retirement funds before the age of 59, employees were able to access up to $100,000 from their retirement funds.

However, accessing retirement funds early with the provisions of the legislation was not entirely consequence-free. Employees who decided to take advantage of the CARES Act provisions are now beginning to experience the many short and long-term financial implications of accessing their retirement funds. Advisors need to be ready to help steer employees back on track with their retirement plans when they are in a position to return focus to retirement savings.

Reassure Worried Employees

Advisors are in a unique position to not only help employees get back on track but to establish long-term relationships with employees. Therefore, when employees are ready and in a financial position to begin saving again, they will feel more confident about their retirement planning decisions.

First, advisors should encourage employees to set aside guilt over having to make withdrawals. Advisors can then demonstrate their value to employees by establishing trust and reassuring worried employees that there is still time to make retirement savings a priority. For employees who accessed retirement funds with the CARES Act, advisors should emphasize the importance of making timely distribution repayments. Advisors can begin by checking with providers for different repayment policies that meet the three-year repayment period. This allows for the creation of a specific and immediate plan of repayment for lost funds. This repayment plan then enables employees to begin focusing on rebuilding their retirement funds.

Rebuild Retirement Funds with a Focus on Security

advisors should encourage employees to set aside guilt over having to make withdrawals. Advisors can then demonstrate their value to employees by establishing trust and reassuring worried employees that there is still time to make retirement savings a priority...

After determining initial repayments, advisors can begin discussing rebuilding retirement savings with employees. Starting with the basics can be helpful. This can include offering webinars on plan investing, video resources and informational emails. Advisors can also provide specific suggestions to make retirement saving simple and attainable for employees. For example, if an employee’s retirement contributions dropped down to zero, employees can try going up to 1% each quarter. A calendar reminder set up each quarter can also help employees check in with their contributions to make incremental adjustments for the next quarter. In addition, advisors should remember to remind employees over the age of 50 that they can use catch-up contributions to max their contribution rates in 2021.

Advisors also need to also focus on bringing stability and security to retirement planning, especially for employees who are concerned about their financial futures. Examining an employee’s risk tolerance can help provide an additional layer of protection for those worried about their financial futures. Employees who were impacted by COVID-19 are searching for a sense of stability with their retirement funds. Therefore, advisors should work directly with the plan sponsor to ensure a well-diversified lineup, including safety-focused options such as a stable value fund. In addition, opening discussions up with employees around retirement plan options can further improve retirement readiness.

Reconnect with Employers and Employees

The CARES Act provided critical funds for many employees, especially those struggling with the financial impact of COVID-19. With over 14% of Americans tapping into retirement savings throughout the pandemic, many employees are feeling overwhelmed with the process of rebuilding their savings. However, as employees begin to get back on track and are ready to start rebuilding their lost retirement funds, advisors must be prepared to help get employees back on track. From discussing immediate steps to repay CARES Act distributions to helping employees reevaluate their retirement plan options, advisors have the opportunity to connect and support employees. Not only is establishing this relationship important for employees as they navigate rebuilding their retirement funds, but it also presents an opportunity for advisors to create meaningful connections that will last beyond the current pandemic.