At the time of its passage, many in the retirement industry were concerned that the CARES Act would “open the floodgates” to a large percentage of workers cashing out years of retirement savings.
Fortunately, that did not happen, according to an analysis by Vanguard of its DC recordkeeping data.
Incorporated within the wide-ranging CARES Act relief package were several provisions that provided flexibility for retirement savers, including Coronavirus-related distributions (CRDs), allowing individuals affected by the Coronavirus to withdraw up to $100,000 from their retirement plan penalty-free until Dec. 30, 2020. Additional relief came in the form of allowing the income tax due on these distributions to be spread over a three-year period, as well as providing investors three years to return the funds to their account.
The Vanguard analysis shows that a modest portion of workers did access their retirement savings in 2020, but that the vast majority of participants “remained steadfast on their retirement journey.”
As for the option of permitting CRDs throughout 2020, 73% of Vanguard’s plan sponsor clients permitted their participants to access retirement funds if needed. Of the participants offered the option to withdraw assets, only 5.7% accessed a portion of their savings. And of those who initiated a withdrawal, 69% took one distribution, while 31% initiated multiple distributions over the nine months.
According to the firm’s data, the average distribution was $15,700 and the median was $6,500. However, since nearly one-third of participants who initiated a withdrawal took multiple distributions, the average participant distribution was approximately $24,600, with a median of $13,300.
And while those are not insignificant amounts, nearly one in four participant distributions were for less than $5,000 and 60% of all withdrawals were for less than $20,000. Vanguard also reports that withdrawals of more than $30,000 were less common, and only 4% of participants who initiated a CRD withdrew the maximum amount of $100,000.
Diving Deeper
On a less positive note, it appears that many of those who initiated withdrawals already had relatively low balances to begin with. When examining the distribution amounts based on the percentage of a participant’s balance, Vanguard found that the average distribution represented 55% of a participant’s total balance. About one in four distributions were for nearly all or 100% of the account balance, while one-half of withdrawals were for less than 50% of their balance.
Not surprisingly, participant adoption rates also varied by demographics. According to the data, participants between the ages of 35 and 54 were the most likely to initiate a CRD, while younger and older participants were less likely. Participants with an income between $30,000 and $75,000 were also more likely to request a CRD, while participants with a lower or higher income were less likely.
Plan Design
Interestingly, when segmenting the participants by plan design, Vanguard found that 6.4% of participants in automatic enrollment plans initiated a CRD, compared with 4.5% in voluntary enrollment plans.
With automatic enrollment being a proven plan design feature that improves employee saving and investment behaviors, it may have also provided participants with an additional last-resort emergency resource. Vanguard notes that, “while a small fraction have accessed their retirement savings, those participants, who may have faced a financial shock, are better off than those who did not have any retirement savings cushion during this period.”
The Impact
As one might expect, participants who accessed their retirement assets early may experience a shortfall upon reaching retirement. The report offers a hypothetical illustration based on the median participant distribution amount of $13,300, the median age of 42, and the median income of about $61,400. Assuming a real investment return of 4%, the median participant distribution would grow to approximately $35,000 over the next 25 years. For the typical participant, this return would represent the future financial impact at retirement, Vanguard notes.
“As affected participants consider how to close this shortfall, the amount by which they may need to increase their savings depends on various factors, such as distribution amount, time until retirement, and earnings,” the report explains. Based on the median amounts, Vanguard notes that many of them could cover this potential shortfall simply by increasing their deferral rate by one percentage point when their financial situation improves.
In addition, highlighting the power of smart plan design, the firm suggests that plan sponsors should consider leveraging various types of automatic solutions—such as automatic annual increases and undersaver sweeps—to help participants.
- Log in to post comments