Thank you all that have submitted questions the past few months. We have had some great ones thrown out and we hope these answers help. Don’t be afraid to ask a question, someone else is probably wondering about the same thing.
Q: Our small company has, of course, suffered due to the Coronavirus. A few employees who had to take pay cuts are considering applying early for their Social Security benefits, rather than continuing to work at reduced pay. Where can we point them for information about this decision?
A: SSA.gov has the most up-to-date, accurate and complete information available on the subject of Social Security. By calling or using their website, people can obtain a statement of how much to expect when they begin receiving payments. Whether or not to begin payments is an important decision with lifetime implications, and it is important for those employees to understand that. Taking benefits early will mean a lifelong reduction in monthly payments. Yet, when the economy takes a downturn, the first inclination of people who are eligible may be to start their benefits early. According to the Center for Retirement Research, about 42% of people who were 62 in 2009, 1 year after the stock market drop in 2008, signed up for their benefits. That was a nearly 5% increase over the prior year. Center for Retirement Research at Boston College has crunched the numbers and published it’s findings of the considerable financial cost of starting Social Security benefits too early.
Q: We were considering doing a re-enrollment in our 401(k) plan before the pandemic hit. Should we go ahead this fall as planned, or wait until next year?
A: Sadly, our crystal ball isn’t working so we don’t know for sure what challenges may lie ahead. But the fundamental reason to do an investment re-enrollment has not really changed: some participants may be keeping their account balance in a fund that is ultraconservative or even in cash or an equivalent fund. They are therefore not able to benefit from a target date fund or your other carefully-selected qualified default investment account (QDIA). Re-enrollment may actually provide some fiduciary protection, because these cash or ultraconservative fund investors may suffer in the long run from low returns. By re-enrolling, you can move them into the QDIA, giving them the opportunity to affirmatively opt out if they so choose. Most probably won’t. When you do decide to go forward with the re-enrollment, be sure to communicate with participants to let them know why you are re-enrolling, and that they do have the opportunity to make their own investment elections.