EBRI Looks at How CRDs Might Affect Retirement Readiness

While the CARES Act provided much-needed relief to those struggling to make ends meet, recent research finds that a failure to repay Coronavirus-related distributions (CRDs) can have a major impact on retirement prospects. 

In an “At a Glance” snapshot of how taking a CRD might affect retirement balances, the Employee Benefit Research Institute reports that the overall median reduction in balances for all workers who take a CRD and fail to repay it is projected to be 20%.  

Using its Retirement Security Projection Model (RSPM), EBRI simulated the impact on retirement balances as a multiple of pay at age 65 for scenarios where employees take full advantage of the flexibility provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to access their defined contribution accounts. 

In general, the CARES Act permitted DC plan sponsors to: 

• increase a plan’s loan limit to the lesser of 100% of the vested account or $100,000; 
• suspend loan payments due before Dec. 31, 2020 and defer loan payments for up to one year; 
• allow distributions up to $100,000 of account balances until the end of 2020; and 
• allow repayment of CRDs over a three-year period. 

As one might expect, the projected impact varies significantly based on age, with the lowest age groups least affected—in part because their current account balances are too small for them to take the full $100,000 distribution—and rises drastically for those closest to retirement. It’s worth emphasizing that the brief offers a worst case-analysis of the impact of the CARES Act on retirement income adequacy conditioned on taking full advantage of the CARES Act provisions.

For example, for those currently age 25-29, their projected reductions in retirement balances would drop by 10%, but that percentage doubles. to 20%. for those age 45-49 and increases to 45% for those age 60-64. 

EBRI notes that even in the case where employers offer the CARES Act provisions, employees are eligible to take the loans or distributions, and employees do so up to the maximum, the impact of the provisions is “mostly modest”—unless employees fail to repay their withdrawal or continue to take CARES Act withdrawals with no payback over time. 

In its preliminary analysis of potential actual aggregate utilization of CARES Act provisions based on employer responses to a Plan Sponsor Council of America (PSCA) survey, EBRI found that reductions were very small. Even in the scenario in which employees fail to pay back CRDs, the aggregate impact—because of low estimated actual implementation and utilization of CARES Act provisions—is estimated to be less than 0.5%. 

The findings further show, however, that the most drastic scenario is one in which workers are continually provided CARES-Act-like access to withdrawals as various crises occur. Using a scenario in which employees take full withdrawals up to $100,000 every 10 years with no payback, the overall median reduction in retirement balances as a multiple of pay at age 65 is 54%.  

EBRI plans to provide additional analysis on the aggregate impact of the CARES Act provisions on retirement income adequacy when participant-level information becomes available. The data in this “At a Glance” was first reported in EBRI’s July 30 Issue Brief, “CARES Act: Implications for Retirement Security of American Workers.”