By: Randy Myers
When the COVID-19 pandemic led to furloughs and layoffs at many organizations last year, it seemed logical to think contributions to workplace retirement savings plans would shrink. As it turns out, that was not always the case.
Despite having fewer plan participants due to furloughs, layoffs and reductions in worker’s hours, Raytheon Technologies Corp.’s 401(k) plans saw an increase in contributions last year, Thomas Borghard, the company’s director of pension investments, said during a roundtable discussion at the 2021 SVIA Spring Seminar. At the Ohio Public Employees Deferred Compensation Program, Paul Miller, director of finance, said the plan saw a 1% increase in the number of participants as police and fire departments, schools and hospitals all pretty much continued to operate. However, the average contribution per participant rose more—by 5%.
On the surface, that just did not make sense, Miller observed, adding. “Our participants were in the worst pandemic in 100 years, and we just set a record for the most inflows ever.”
Moderated by SVIA President Gina Mitchell, the roundtable discussion focused on how plan sponsors were impacted by the pandemic and what they learned from the experience. Also participating was Laura Pugliese, portfolio manager with the Virginia Retirement System, which operates a defined benefit pension plan as well as eight defined contribution plans.
While Virginia’s recordkeeper reported that some plan participants stopped contributing to their retirement savings accounts last year, Pugliese said, there was no reduction overall in how much money was flowing into the plans and that the recordkeeper intends to encourage participants to reinstate their contributions. Participants took about $25.4 million in Coronavirus related distributions from the three plans in which they were permitted, Pugliese said, including approximately $5.5 million from the stable value fund. That latter figure represented less than 1% of total stable value assets, however, and was easily offset by participants moving $45 million out of other investment options and into stable value.
Raytheon employees utilized CARES Act withdrawals, Borghard reported, which was a relatively small percentage compared to the company’s roughly $55 billion in total DC plan assets. (On April 3, 2020, United Technologies Corp. and Raytheon Company merged to form Raytheon Technologies Corp. The new company is in the process of merging the retirement savings plans of the two predecessor companies. Shortly before the merger, United Technologies had spun off two of its businesses, Carrier and Otis, which then formed retirement savings plans of their own.)
Miller said that in the spirit of the CARE Act the Ohio plan loosened its documentation rules around participant withdrawals for financial hardship in 2020. The result was a 240% increase in the number of withdrawals from the prior year, and a 600% increase in the dollar amounts that were withdrawn.
Participant communications become more important
With so much turmoil generated by the pandemic, including a shift to working from home, communicating with plan participants became even more important than usual during the pandemic, the plan sponsors agreed. Participants working remotely still needed to be informed about changes to their plan, including hardship withdrawal options, and about the importance of continuing to save for retirement during a tumultuous time for the financial markets. In Ohio, inquiries by phone and email shot up, and much the same thing happened in Virginia.
Pugliese said the recordkeeper for its plans added more people to its call center to handle participant inquiries, and conducted nearly 500 webinars over the course of 2020, up from about 80 in 2019. An unexpected benefit, she noted, was that more participants were able to include their spouses in individual counseling sessions that were held virtually, something the state and its recordkeeper hope will continue moving forward. They also found participants who could not always attend a meeting with their field representative could easily attend another meeting outside their geographic area when events were held virtually.
None of the plan sponsors cut back employer contributions to their retirement savings plans last year. Raytheon even held employer contributions for furloughed employees at their pre-furlough rates. “Retirement is important to our company,” Borghard explained. “As calls were coming through on different ways to save money or preserve cash flow last year, the retirement plan was one thing that was never tapped on the shoulder.”
Challenges then and now
The challenges plan sponsors have faced in running their retirement plans during a pandemic are like those experienced by organizations everywhere—collaborating while working remotely, for example, and getting to know and negotiate with potential new vendors virtually rather than in person. But the challenges also were unique to what their plans were experiencing. Raytheon had to deal with a corporate merger and two spinoffs. Ohio hired an executive director to replace the incumbent who retired, rolled out a new participant website and Roth option, closed two investment options, added two new ones, and switched to a new master custodian. Ohio also found it challenging to process all the paperwork associated with withdrawal requests, Miller said, and is now looking to simplify, digitize and automate those processes as much as possible.
Moving forward, the plan sponsors acknowledged that they will be challenged on the stable value front with trying to deliver meaningful returns in the low interest-rate environment that is persisted now for years. Miller noted that many of his plan’s participants have stuck with the state’s stable value offering even as they have seen crediting rates fall from the 7% range to the 2% range, and he predicted they will stick with it even if it tracks down to 1%. “It’s disappointing, obviously,” he said. “They’re not going to build a retirement nest egg at those kinds of yield, but they will be able to preserve one.”
However, Borghard warned that if inflation ticks up, as some economists now worry, stable value crediting rates could fall below the inflation rate. A real negative crediting rate, he cautioned, could lead to a deterioration in living standards for plan participants invested in the asset class.
Currently, Raytheon wraps equities in its stable value portfolio, which has helped with maintaining positive crediting rates and has a surplus in the portfolio’s market value relative to its book value. “We’ve talked about what we do to continue to find yield in a basically yield-less environment,” Borghard said. “We’re trying to get in front of it and think creatively. If crediting rates drop too far, participants, particularly the approximately 80% who are retired, are not going to be as happy.”
At the same time, Borghard noted, Raytheon is mindful that stable value’s first and most important mandate is principal preservation—a sentiment shared by Pugliese, who said, “We have an older demographic in our participant base, so compared to our peers we tend to have a shorter duration in our stable value portfolio.” Pugliese noted she continues to monitor participant cash flows and withdrawals. And like her colleagues, she anticipates that stable value portfolio management will evolve to deliver principal preservation, yield, and liquidity.