Post-Pandemic: Maintaining and Growing 401(k)s in the New Economy

The number of companies offering pensions has decreased dramatically in recent years, and the prevalence of employers opting for a 401(k) in their place is projected to continue to flourish in a world on the other side of the Coronavirus. If you have a 401(k) retirement savings plan, the effort to predict how a post-pandemic economy will affect your nest egg has probably been top of mind. Should you take advantage of the recent provisions set forth in the CARES Act? What do economists think the coming recession will look like? At this juncture, there are three main facets for young retirement plan-contributors and seasoned investors alike to consider: 

• how this investment product became so prominent as the preferred retirement package offered by employers 

• the pros and cons of the new provisions from the CARES Act allowing American citizens to withdraw funds from their retirement accounts tax- and penalty-free 

• and, what economists predict about the future of 401(k)s in the economic landscape to follow COVID-19 

In order to form an accurate hypothesis about 401(k)s in the new economy, we need some perspective on the history of retirement accounts, specifically the knowledge that the vast majority of employer-provided retirement accounts have switched from a pension plan to a 401(k), leaving employees to ensure their assets are wisely-distributed. A traditional pension holds the employer accountable for the risk and responsibility associated with investing their employees' retirement funds. In contrast, a 401(k) account allows for an employee's autonomy over investment decisions, although they typically must create their investment portfolio from a selection of employer-approved stock and bond mutual funds. Target-date funds, composed of an assortment of stocks and bonds, are also usually included with a 401(k) and largely determine an investment portfolio's management style, which ranges along a spectrum between very conservative to very aggressive. And, that strategy determines how susceptible your savings is in the midst of a recession, such as the one we've just entered. 

Current affairs have altered the traditional advice to avoid taking an early withdrawal from your 401(k). Previously, those who did so incurred an early withdrawal penalty of 10% in addition to the need to pay taxes on the withdrawal when it comes time to file next. Now, provisions under the CARE Act allow for penalty-free early withdrawal of retirement funds. Although you'll still have to pay income taxes, the IRS providing the option to pay that money in installments for up to the next three years. To consider an alternative scenario, for those who have liquid capital, now is an excellent time to invest in artificial intelligence software companies and companies with online business-models. Amazon and streaming platforms like Netlix have also hit record highs recently, and current investors should be examining their options with that insight in mind, creating a diversified portfolio of investments and positioning themselves as well as possible to ride out the coming storm. 

Economists had been forecasting the coming of a recession by the end of 2021 for years before the multi-layered crises of COVID-19. In light of recent events, the International Monetary Fund (IMF) predicts that, if the virus subsides by the middle of this year, the global economy will likely shrink by 3% this year, but they also expect global growth to rise to 5.8% next year. Of course, these projections are under the assumption that mitigation of the virus's spread will be accomplished by mid-June 2020. We'll have to wait to see how long the pandemic lasts before we can approach an accurate approximation of its effects. 

Moving forward, economists have a few insights for those who have just entered into this bear-market with a 401(k) or other stock-dependent retirement account: save as much as you can, avoid trading unless you have liquid funds and a strategic plan, and don't panic. The market will recover as it has time and time again. So, it's up to you to remember that a long, happy, and healthy retirement is yours for the taking with the right arsenal of financial tools and support.