How financial advisors can prepare clients for layoffs

5 things financial advisors can do to prepare clients for layoffs

April 10, 2023 5:38 PM

The current economic climate has led to a wave of layoffs across the United States.

Just last year, half of the 700 U.S. executives and board members who participated in a survey by accounting firm PricewaterhouseCoopers said they were reducing headcount or plan to. Over half of them had already implemented hiring freezes.

Job cuts in March were up 15% compared to the previous month, according to a report by the global outplacement and business and executive coaching firm Challenger, Gray & Christmas. The report found that the number is also up 319% from the 21,387 cuts announced in the same month in 2022.

"We know companies are approaching 2023 with caution, though the economy is still creating jobs," Andrew Challenger, senior vice president of Challenger, Gray & Christmas, said in a statement. "With rate hikes continuing and companies' reigning in costs, the large-scale layoffs we are seeing will likely continue."

Even though there's not a way to predict who will be next, advisors can help their clients prepare their finances to make their potential unemployment period less stressful.

Michael Muniz, financial planner at The Mohr Group, a firm based in San Diego, said it's important to listen to the client and be supportive of their concerns before discussing the potential layoff and what this would mean for them financially.

"Talk to the client about their attitudes towards the layoff," Muniz said. "Gather any relevant information from the company or other employees with layoff experience at the company — layoff scenarios can vary depending on the employer."

Emergency fund

The plan should start by checking the client's expenses and cash flow.

Jeff Mattonelli, advisor at Van Leeuwen & Company, a firm based in Princeton, New Jersey, said the focus should be on shifting money to a savings account to build up an emergency fund. He recommends an amount of anywhere between three to six months of expenses. That can be achieved by cutting inessential expenses and maintaining only fixed expenses, such as utilities, mortgage and rent payments.

"If there are any costs or large expenses that they were preparing for, maybe it's time to delay those and shift to savings, focusing more on an emergency fund," he said.

If the client needs to boost their emergency fund in a short time, Muniz said the strategy should be on reviewing the amount of money they're contributing to long-term investments like retirement plans.

"All of a sudden, instead of needing that money in 30 years, you might need that money in 30 days," he said. "Depending on the situation, you could reduce the amount you're contributing to retirement plans temporarily and resume contributions when you can comfortably say the money isn't needed for many years in the future."

Manage debt

For clients that need the extra capital, this might also be the time to consider getting a loan while they still have a regular income to report in the application, according to Muniz.

Mattonelli disagreed, however, and said clients should avoid taking on additional debt so they don't "have to start making payments again, when you don't know what the timeline would be until they get a new job."

Instead, the time should be spent evaluating if it's possible to pay off any current debt, even if it's just part of it.

"If they have the ability to pay off a bit of it and make those payments a bit more manageable during the time period that they are out of work, then that may be advisable," Mattonelli said. "We want to make sure that they still have ample cash reserves available so that they can make payments toward rent, mortgage and other expenses for the time period."

Consider health insurance options

Being out of work for many clients also means being cut off from certain benefits, such as health insurance. If a client thinks a layoff is imminent, they should consider getting a health checkup and scheduling appointments with doctors while they still have those benefits, Mattonelli said.

Muniz also said that if the client's spouse is employed, it's also important to consider and review if there are any health insurance benefits from the spouse's employer that could extend to the client.

If not, the next step is to start looking at the Continuation of Health Coverage that gives workers and their families the right to continue using the insurance benefits for a period of time in certain cases that include job loss. The cost needs to be considered when budgeting. Individuals may be required to pay the entire premium for coverage up to 102% of the cost to the plan, according to the Department of Labor.

If the company also offers other types of benefits, such as life insurance, Mattonelli said it's important to see if those coverages have portability or how to make them permanent policies outside of the employer.

"We should get an understanding of what those costs would be or how the coverage changes, and then a decision can be made on whether or not to maintain those coverages," he said.

Evaluate 401(k)s

It's also important to know the options for clients with 401(k)s or similar employer-sponsored retirement plans. As Muniz said, most plan participants can keep their retirement savings in the 401(k) after they separate from the company, but "there can be plan-specific rules that would require a minimum dollar amount to stay in the plan past a certain period of time." The clients' options may vary from remaining in the current plan, moving to the future employer's or shifting to an IRA.

If they have taken out a loan from the retirement plan, they should know what the loan payoff options are if they no longer have payroll deductions going into the 401(k) when they are let go. Most plans usually demand repayment of the debt anywhere from 30 to 90 days after the layoff.

Mattonelli said it's important to understand the timeline and the options for moving a plan into an IRA to avoid the balance becoming a taxable distribution or getting a 10% penalty if the payment is not made on time.

Analyze stock compensation

Clients with stock-based compensation require an extra layer of work when preparing for a potential layoff. It's important to check the vesting schedule to know what they're eligible for if that means exercising their options before expiration.

Each company has a different post-termination exercise period for employees after they're laid off. According to Carta, an ownership and equity management platform that helps employers and employees manage those types of compensation, that period usually is 95 days or less after the layoff. But companies are being more generous and giving longer periods since the onset of the pandemic.

Mattonelli said any amount recovered can be used to bolster the savings account and invest over a period of time.

"If there is any severance package, you can try to get whatever the value is that's being left on the table," he said. "It's possible that they could receive it as a cash bonus or something like that to make up for the value that they potentially are losing."

Overall, Muniz said advisors can make this period easier for their clients by creating a 12-month timeline.

"Showing clients a runway of time can be helpful," he said.