The United States has opened up retirement plans for participant withdrawals during the COVID-19 crisis more so than any other country, according to a report from the Defined Contribution Institutional Investment Association (DCIIA).
In fact, only three other countries in DCIIA’s report allowed for withdrawals. However, these were either set monthly or annual payments. No other country in the report, “Initial Impacts of Coronavirus on Global Defined Contribution Plans,” initiated anything like the Coronavirus Aid, Relief and Economic Security (CARES) Act implemented in the U.S.
While hardship withdrawals are allowed by many defined contribution (DC) plans, the CARES Act created a new type of distribution, called a coronavirus-related distribution (CRD), which can be taken in amounts up to $100,000, and expanded retirement plan loan limits.
The fact that the U.S. offered more help in the form of retirement plan distributions struck Neil Lloyd, partner and head of US Defined Contribution & Financial Wellness Research at Mercer in Vancouver, Canada, as interesting. Lloyd says he believes different thinking about retirement plans is the reason for the difference in the U.S., more so than any problem with logistics due to plan design. But he also notes that what makes the U.S. different is that this has happened before to some extent. “It’s not like these tactics are brand new. It happens with hurricane or wildfire relief. Other countries haven’t done this to the same degree,” he says.
For example, Lloyd says he found it “quite unusual” that Australia gave access to some retirement funds. According to DCIIA’s report, “Australians rendered unemployed/underemployed may withdraw A$10,000 (USD$5,800) from their superannuation savings plans in 2020 and again in 2021.” Lloyd explains that the superannuation fund in Australia has not typically given people access to money, and it has a big market impact on the fund because it has more illiquid assets in its portfolio.
Lloyd says that, in his experience, a key part of the UK’s mindset about retirement plans is the sanctity of preserving their assets. “That’s been the system’s mindset for almost 30 years,” he says. He adds that the Canadian retirement industry is still mostly based on targeted benefit programs and is less DC plan-focused, so “it has more of a rational retirement-first focus.”
Lew Minsky, president and CEO of DCIIA in West Palm Beach, Florida, says the reason for disparities among the countries in the report can be attributed to both logistics and a different thinking about retirement plans. “Generally, there are design structures in place in most of these countries’ retirement plans that make it harder for withdrawals and loans to be taken, but this is because they are philosophically more focused on preserving retirement plan assets for retirement and not supplemental savings,” he explains.
Minsky says the DC plan system in the U.S. is getting there, but is still in the process of making that transition. “Our system is in the early phase of allowing portability of retirement plan balances,” he says. “Other countries’ systems use a more centralized design or, as in the UK, the pot follows the member. They are further along in preventing potential leakage of retirement assets.”
Lesson to Learn
Still, Lloyd says he thinks the CARES Act was a positive thing. “There was a shortage in people’s financial need that needed to be addressed. Retirement is something we still need to deal with, but it’s not today’s problem,” he says. Lloyd finds that, in general, when he talks with U.S. employers, they are more aware than employers in other countries of the concept of financial wellness and how much employees have competing financial priorities. He cited a prior research report from Mercer that suggested employers should always be aware that, for many people, retirement is not their first priority. “There needs to be a balancing act,” Lloyd says. “If a retirement plan doesn’t allow people to access their money, people may not put money into it.”
The DCIIA report lists Denmark as one of the countries that has not allowed retirement plan withdrawals or loans, but it points out other measures the government took to help employees maintain salaries. That is what Minsky says the CARES Act did. “It didn’t just open up DC plans; it extended unemployment to more people, increased unemployment insurance payments and offered forgivable loans for business owners,” he says. “One of the bits of evidence that that has generally worked is there hasn’t been much take up in people accessing retirement plan distributions and loans.”
Lloyd says the positive message is that DC plans can help people with more than just retirement. “I think now we will look at what have we learned. If there’s [a natural disaster or health crisis] every single year, people are never going to save for retirement,” he says. “There’s a need for people to put money aside to address crises. I feel a discussion about that now will be insensitive, but we will need to start these conversations after this is over.”
Minsky also notes that other countries have done a good job of creating other pools of assets to be tapped into in cases of emergency. He notes that, in the UK, there is active development of emergency savings vehicles adjacent to and not inside of the National Employment Savings Trust (NEST) program. “That is an initiative the U.S. can follow and learn from,” he says. Minsky notes that similar efforts are happening in Canada.
That’s one issue Lloyd says he hopes the retirement industry learns—the importance of having emergency savings accounts. “It can be a totally separate savings opportunity, but it could be some of an employee’s contribution goes to emergency savings until a time when it reverts to the DC plan,” he says. Lloyd notes that some state plans put employees’ money in cash accounts in the first year, which almost creates an emergency savings account because if people have to take a distribution, they won’t have asset losses.
Lloyd concedes that the opening of DC plans for employees’ financial needs during COVID-19 could have been done with better controls, but he notes there was a time crunch. The economic effects of the pandemic happened in a short period of time and Congress had to react quickly. Again, Lloyd says, he hopes a lesson is learned so that, maybe next time, Congress will be prepared with a more refined response.
There should be a balance between providing funds when necessary and having in place guardrails to preserve retirement savings, Minsky says. “The [CRD] repayment provision [of the CARES Act] was smart, but it’s worth looking at short-term savings opportunities going forward so we eliminate the need to tap into retirement savings,” he says.
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