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Is My Retirement Plan at Risk Due to the COVID-19 Crisis?

We have been following the devastating effects of the current COVID-19 crisis, and while the human cost is far more important, there is also an economic component that is affecting everyone. Many individuals have lost their jobs, businesses are on the brink of economic collapse, and our healthcare system is being stretched to its limits.  We hope that everyone stays safe and that things will return to normal in the near future.


We have been getting a lot of questions from individuals about whether their retirement plan is at risk due to the current crisis.  While we do not know how long the current shutdown will last, we thought it would be helpful to post some facts about the protections in each type of pension plan. The protections vary by the type of employer and type of plan so we have broken this into separate sections.


For individuals with retirement savings plans such as 401(k)s: The answer is that the current economic downturn will probably reduce your account balance.  How much of a reduction will depend on your investment portfolio.  If the past is any indication, the markets should come back to normal when the crisis is over, and most people should avoid the impulse to panic. 


The recently enacted CARES Act will allow some people affected by the COVID-19 crisis to borrow up to $100,000 from their 401(k) plans to meet their financial needs and to withdraw money they have contributed without paying a tax penalty. But borrowed money will have to be repaid and income taxes will still be owed on withdrawn money. Also, you should know that most financial experts say that the worst thing individuals can do is withdraw their benefits when the market is at a record low – unless the person has a severe economic hardship and no other source of money.  


You should also know that employers are permitted to stop matching employees’ 401(k) contributions if they follow certain rules.  However, they must continue to put your own 401(k) contributions into your plan unless you ask for a change.  If your employer takes a retirement plan contribution out of your paycheck but does not put it into your account in a reasonable amount of time, it is violating the law.  If you think your employer is using your employee 401(k) contributions to fund its expenses, rather than putting them into your account, you should consider contacting the Department of Labor immediately at (866) 444-3272. 


For individuals with a pension plan provided by a company: While the COVID-19 crisis has caused a significant decrease in the stock market, the payments of pension benefits are made over many years so any temporary downturn in overall funding should not impact benefits from a pension plan that is in otherwise good financial shape.


That is because “single employer” pension plans are usually quite well-funded by the employer. According to a recent article, one reason is that accounting rules require these plans to provide a rainy-day cushion in times such as this.  Although the CARES Act allows companies to postpone making required contributions to pension plans during the COVID-19 crisis, this is a temporary measure.


Even if a company pension plan faces severe financial problems and the plan is terminated, most participants will be fully protected by the federal government’s pension insurance program, the Pension Benefit Guaranty Corporation. The PBGC’s Single Employer guarantee fund is presently in good financial condition. A concern for employees in plans that are slightly underfunded is that if their employers are not able to continue to fund the current benefit levels, they might choose to freeze benefits going forward. 


For individuals in multiemployer pension plans: The situation for plans negotiated by a union with a group of employers is more complicated.  Although most multiemployer plans are in good shape, some are facing serious financial problems.  These problems, which are the result of longstanding and pre-existing issues that were already stressing these pension plans, are likely to become even more severe.  This could mean that benefits in these plans could be reduced.  The PBGC’s guarantees for multiemployer plans are much lower than those for single employer plans.  We recommend you review your most recent funding notice from your pension plan to see if there is any cause for concern.  If you have received a notice that your plan is in “critical and declining status” you should read our fact sheets on resources for multiemployer reform.  For more information on multiemployer plans, you should check out our fact sheet on multiemployer funding.


For individuals in government pension plans: Pension benefits provided by many state governments are protected by either state statute or the state constitution, regardless of the funding level of the plan.  Whether cutbacks are allowed varies from state to state.  You might find this Center for Retirement Research issue brief helpful on this topic. Federal and military pensions are also likely to be unaffected by the crisis.

 

For individuals in “church plans”:There are currently no protections in federal law for individuals in pension plans provided by religious institutions.  Religiously affiliated hospitals, schools and social services agencies take the position that federal law also does not apply to their plans.  For more information about church plans see our fact sheets.  Investment losses resulting from COVID-19’s effect on the stock market could severely impact those plans already experiencing financial difficulties.  In the past, some plans have stopped paying pensions when they experienced financial problems. Retirees in those plans are now looking to the religious institutions to save their pension benefits. 

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