A Critical Time to Protect the Vulnerable

By Thomas Hawkins
Published on May 28, 2020

Protect the VulnerableThe COVID-19 crisis has taught many painful lessons – but perhaps none more important than the need to protect those who are most vulnerable to the pandemic’s ill effects.
For retirement savers, recently terminated participants are particularly vulnerable to financial emergencies, or in many cases, simply to poor decision-making. When engaging newly terminated participants, it’s critical for plan sponsors to listen, to educate – and in many cases – to protect them from calamity or simply from their own poor decision making.

What’s A True Financial Emergency?
A true financial emergency occurs when terminated participants exhaust emergency sources of funds and face the imminent loss of their home or the inability to acquire basic necessities, such as food, water, power, transportation or medical treatments.

Provisions of the CARES Act that ease access to retirement balances were designed specifically with these situations in mind. Thus far, survey results suggest that uptake on these provisions is modest – for now, at around 4-5% of participants.

Stemming Unnecessary Cashout Leakage
Other participants terminated as a result of the crisis may panic and impulsively withdraw their retirement savings, despite having other assets, sources of unused credit, or supplemental income. They may also be resistant to reducing spending, prone to poor decision-making, succumb to temptation, or in some cases, can be at risk for fraudulent investment schemes.

Engaging Newly Terminated Participants
Engaging newly-terminated participants with education and assistance is vital to ensuring that they’re adequately protected. At Retirement Clearinghouse, we’ve been successful at counseling participants following termination and quickly identifying whether their distribution request is based upon a financial emergency.

If the participant is not facing a financial emergency, we’ll carefully explain their options and illustrate the high cost of cashing out with an online cashout calculator. In many cases, we can help prevent an unnecessary cashout altogether, or convince the participant to make a partial withdrawal. This approach has been proven to reduce unnecessary cashouts by over 50%, across all balance levels.

We suggest that all plan sponsors consider taking steps to provide participants with access to similar counseling, not only during the crisis, but beyond.

Reconnecting Missing Participants with Their Balances
In addition to driving high levels of withdrawals, the surge in terminated participants could result in many participants losing track of their savings. The combination of temporarily reduced participant mobility, along with a surge in distribution requests, makes this an opportune time to for plan sponsors to consider conducting missing participant searches to bring participants’ records up-to-date.

Let’s Protect the Vulnerable
In these extraordinary times, every dollar -- whether it’s used for a financial emergency or preserved for retirement – matters greatly. We owe it to participants to help them make the right decisions during these difficult times.

 

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