According to an EBRI issue brief, “Impact of the COVID-19 Pandemic on Retirement Income Adequacy: Evidence from EBRI’s Retirement Security Projection Model,” the impact of the COVID-19 pandemic on retirement savings shortfalls “appears to be manageable.”
EBRI says the $3.68 trillion deficit for all U.S. households between the ages of 35 and 64 increased by 4.5%, or $166.21 billion. With the combination of pessimistic assumptions in its analysis, the aggregate retirement deficits increased by 11.2% or $412.77 billion.
EBRI examined three possible sets of assumptions for the effects of the pandemic. In the optimistic set of assumptions, market losses are restricted to half of the first quarter of 2020 and job losses are modest. Plan sponsors and participants only modestly cut back on their defined contribution (DC) plan contributions, and participants only withdraw small amounts of money from their plans. In the intermediate scenario, market losses for the year are equivalent to first quarter 2020 losses accompanied by greater economic effects. In a pessimistic set of assumptions, market losses are equivalent to those that happened in the 2007-2009 financial crisis and economic effects are the most extreme.
EBRI says, “Market volatility may be largest factor during this crisis in increasing retirement savings shortfalls and decreasing savings surpluses, especially in a worst-case scenario. For the youngest workers, permanent termination of DC plans under $10 million in assets could have a large impact. Match suspensions by plan sponsors, contribution suspensions by workers, increases in withdrawals and decreased eligibility do not have as much impact when spread over all U.S. households.”
The Society of Actuaries (SOA) recently launched an online conversation about the impact of COVID-19 on retirement risks. Participants in the conversation included actuaries, economists, attorneys, financial advisers, benefit plan sponsors, demographers, academics and policy researchers, among others.
In a primarily DC plan environment, individual investment decisions are critical, the SOA says, “but many workers lack investment confidence and knowledge to navigate the current market volatility.” It notes from the online conversation that default investment options offer individuals a path toward decision-making. Sources have confirmed that most DC plan participants invested in a qualified default investment alternative (QDIA) refrained from trading in the first quarter—preventing possible long-term damage to their retirement savings. The fact that 97% of plans with a QDIA use a target-date fund (TDF) as the QDIA offers hope that market volatility caused by COVID-19 will not greatly affect retirement savings shortfalls.
Early data suggests plan sponsors are reacting with moderation to the pandemic. PLANSPONSOR fielded a pulse survey of respondents to our 2019 Defined Contribution Survey April 7 through 10. Responses were received from 387 DC plan sponsors from a wide range of employer sizes. Overall, one-third of respondents that offer an employer match in their DC plans have discussed reducing or suspending it. Only 21% had already taken action to do so, while 13% said they are likely to take action.
As for employees withdrawing money from their DC plan accounts. EBRI estimates in an optimistic scenario, 6.6% of participants would withdraw money. In an intermediate scenario, 13.2% would withdraw money, and in a pessimistic scenario, 26.5% of participants would withdraw money.
In the online conversation facilitated by the SOA, those who gave input said hardship withdrawals and participant loans are likely to increase. This may be true considering that the Coronavirus Aid, Relief and Economic Security (CARES) Act waives the 10% tax penalty on newly created coronavirus-related distributions (CRDs), hardship withdrawals and in-service distributions for those younger than 59 1/2. The law also expands participant loan limits.
Conversation participants say if employees need to borrow and can borrow from a DC plan, it may be better than borrowing through a credit card or taking out a higher-interest loan. However, Alight Solutions has taken the position that taking a withdrawal is better for long-term retirement outcomes than taking a loan, in part because of the chance of loan default. Plan sponsors are also urged to consider factors other than the short-term financial needs of their employees before adopting new loan or distribution provisions.
EBRI says a future issue brief will explore the impact of the CARES Act on retirement savings shortfalls, factoring in the ability of affected workers to take much bigger loans and withdrawals than in the Great Recession.
“While employers and policymakers cannot control market fluctuations, they can be aware of the impact of plan sponsor and participant behavior on retirement income adequacy and develop approaches that can help mitigate damaging behavior today and position plans for robust utilization when the crisis ends,” EBRI says.
One thing plan sponsors may consider is plan design needs. Participants in the SOA conversation expressed concerns over whether DC plans offer sufficient retirement security. The pandemic has revealed the fragility of retirement security in the current landscape.
Findings from a Gallup survey show that Americans now expect to rely more on Social Security for retirement income. Polled between April 1 and April 14, 88% said they expect to rely on Social Security, up from 83% of those polled between April 1 and April 9 last year.
Gallup’s survey seems to indicate that, at this point, Americans agree with EBRI’s conclusion that the effect of COVID-19 on retirement savings is manageable. For one, Gallup says an indication that the COVID-19 economy isn’t rattling consumers’ long-term financial outlook comes from non-retirees’ estimate of the age at which they expect to retire, currently averaging 66. This is similar to the average expected age of retirement recorded each year since 2009.
In conclusion, Gallup says, “with most Americans still retaining their jobs and taking no hit to their income, many have yet to personally experience the economic effects of the COVID-19 crisis. As a result, their ratings of their current financial situation are down only slightly, and their concern about having enough money for retirement is up only slightly.”
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