How COVID-19 and the CARES Act Have Impacted Retirement Plans

By Randy Myers

Here’s good news for plan sponsors worried about employees withdrawing money early from their retirement savings plans and jeopardizing their long-term financial security. Even after Congress made it easier amid the COVID-19 pandemic this year, few actually did it.

Participating in a virtual panel discussion at the 2020 SVIA Fall Forum led by Jim Jensen, partner and senior consultant at investment advisor DiMeo Schneider & Associates, representatives from a trio of large recordkeepers said only about 2.5% to 3% of participants in defined contribution retirement plans took emergency distributions under provisions of the CARES Act of 2020.

Signed into law on March 27, the CARES Act allows plan participants to withdraw up to $100,000 from their retirement accounts this year without an early-distribution penalty, provided they or a family member were impacted by COVID-19. The Act also allows income taxes on withdrawals, typically due in the year of the distribution, to be spread out over three years and forgiven entirely if the distribution is repaid within that timeframe. The legislation also doubles the maximum amount a participant can borrow from their retirement account this year, and allows participants to postpone any payments due on those loans until 2021.

Plan sponsors were able to decide whether to make the CARES Act provisions available to their plan participants and most did, said Simon Franklin, vice president of relationship management at Empower Retirement; Katie Taylor, vice president of thought leadership at Fidelity Investments; and Amy Vaillancourt, senior vice president for workplace solutions and experience at Voya Financial. At Empower, sponsor participation rates ranged from 80% to 90% for the various provisions. Larger plan sponsors were somewhat more likely to embrace them than smaller ones.

“Employers were quick to react because of the urgency of the situation, but they did it thoughtfully, with input from their advisors and other representatives of their plan,” Vaillancourt said.

At Empower, Franklin said, early distribution activity so far this year is only a little higher than it was in 2019, with the average distribution equal to about 44% of the participant’s account balance. Only about a third of those taking distributions took the full amount they were eligible to withdraw.

What can’t be known right now, Vaillancourt said, is whether there will be a rush of withdrawals in December, given that CARES Act distributions won’t be available afterward barring further action by Congress.

The panelists noted that some industries saw higher percentage of distributions than others as a result of their employees being hit harder by the economic fallout from the pandemic, including the health care, manufacturing, airline and oil and gas industries. But overall, they suggested, plan participants seemed to be taking only what they needed to get by—about $12,000 on average at Fidelity, with a median distribution more in the range of $4,000 to $5,000.

While plan sponsors are starting to have conversations with recordkeepers about how they can encourage participants to repay loans or other early distributions from their retirement accounts, Vaillancourt said that topic has not been a high priority with most of the plan participants ringing its call centers. Franklin said he doesn’t expect a rush to repayment of CARES distributions, either, although that could be costly. Jensen noted that the Employee Benefit Research Institute recently estimated that if all participants of all ages withdrew the maximum possible from their accounts (up to $100,000) and did not repay it, they would collectively see a 20% reduction in their ending retirement balances.

Although recordkeeper call centers have received higher volumes of inquiries from plan participants since the pandemic’s outbreak, the panelists said, relatively few participants are making changes to their asset allocation strategies or their contribution levels. At Voya, Vaillancourt said, more than 90% of participants didn’t make any changes. At Empower, Franklin added, about 65% of those making changes to their contribution levels in the six months following the market’s March downturn actually increased their contributions—just slightly less than the 74% who made increases in the six months prior to the downturn. Franklin also reported a 13% increase in stable value assets under management for one of its stable value providers in March alone. Another provider in its plans saw a 146% increase in stable value inflows during the first six months of 2020 compared with the year-earlier period.

Like plan participants, plan sponsors also have been measured in their response to the economic downturn triggered by the pandemic. Taylor said about 11% of the sponsors working with Fidelity made “the difficult decision” to suspend their matching contributions to their plan, and another 9% were in conversations about possibly doing it, leaving 80% who made no change and do not plan any. Of those that did suspend their match, she added, about 80% say they plan to reinstate it at some point.

“Most plan sponsors hold their matching contribution near and dear—a bit of a sacred cow relative to their other benefits,” Franklin said.

One area where plan sponsors do appear more inclined to consider a change, the panelists said, is in making some sort of emergency savings program available to their employees so that when difficult times strike in the future they may not need to tap into their retirement nest eggs.

In general, the panelists didn’t think the addition of new benefits to employer benefits menus, such as emergency savings programs and Health Savings Accounts, would reduce the amount of money going into retirement savings plans. American workers, they said, largely recognize the importance of prioritizing saving for retirement. Still, Vaillancourt noted, “We cannot take our foot of the gas on education. That’s an ongoing need.”