Few Individuals Expected to Dip Into Retirement Accounts

Even as Congress fails to enact new relief legislation, experts say they do not suspect defined contribution (DC) plan withdrawals will rise.

When the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed in March, many retirement industry experts expected a surge of frantic participants would tap into their retirement accounts.

Yet, so far, only a small number of individuals have borrowed money from their accounts. A Vanguard study showed less than 1% of participants have taken distributions from their retirement savings. Now, even as Congress stalls on new legislation that would potentially extend relief measures such as higher unemployment checks and stimulus payments, individuals are still unlikely to reach into their savings pockets, says Mark Smrecek, senior director of retirement at Willis Towers Watson.

Smrecek says that while there was an initial bump in withdrawals due to the CARES Act, it was smaller than anticipated. “We’ve been seeing generally 2% to 3% of employees dipping into their savings as much as the CARES Act would allow,” he adds. “The primary timeframe there was before May 31, and so, with stimulus and [unemployment] dollars coming back stalling out with legislation, we may see another jump in terms of withdrawals. However, the initial bump was relatively small as a percent of total participants. I’m not certain that it’ll be large in terms of magnitude.”

Christopher Barnes, chief product officer (CPO) and managing director of the Financial Services Research division of Escalent, says he anticipates that while retirement withdrawals will stay low, there will be those who need to tap into retirement savings. Unemployed individuals with fewer discretionary spending options to cut back on and who must cover their necessities, such as rent and day-to-day expenses, will be borrowing from their retirement accounts, even if they don’t have much saved, he says. “We’re going to see that population that was on the margin—that was doing just all right before this—they’re going to hit the end of forbearance,” he adds. “They’re going to tap into their retirement savings, and they’re going to be the ones who have the least retirement savings to tap.”

For those who are employed, alternatives to withdrawing from savings could mean taking an employer loan or taking a payroll tax deferral, an option under the payroll tax holiday enacted through a presidential memorandum that President Donald Trump signed last month, Barnes says. However, he advises employers to warn workers about the consequences of those decisions, or to guide them to third parties who could discuss effects of accumulating the extra cash. For example, once the payroll tax deferral period ends, workers will have to pay back what they owe.

“You don’t want people wandering into situations when they’re not fully informed,” Barnes says. “Employees are not normally making complex tax decisions, but now they are. Employers have to be ready to, if not necessarily counsel the individual, then point them in the direction of the right people to get the right advice.”