What a Year Without Retirement Savings Can Do to Participant Outcomes

Scenarios show what a break in savings, as well as distributions and loans, can do to a participant’s retirement account balance, and experts share tips for helping participants get back on track.

As Americans faced financial hits related to the COVID-19 pandemic, their retirement savings might have suffered. Many employees were laid off or furloughed, and the Coronavirus Aid, Relief and Economic Security (CARES) Act made it possible for retirement plan participants to tap into their savings through increased distribution and loan amounts if they needed the money to make ends meet.

Fidelity Investments’ Pandemic Impact research, conducted last September, found employees were not only impacted by layoffs and furloughs during the pandemic, but that 5% stepped out from their jobs due to caregiving responsibilities. Nearly half (48%) of respondents said they or their spouse/partner were considering leaving work or reducing their current work hours. Women were two times as likely as men to make the decision to step out of the workforce due to caregiving responsibilities.

“The problem compounds because women tend to live longer and will need more to live on,” notes Wei Hu, vice president of financial research at Edelman Financial Engines.

Aside from the pandemic, however, individuals might experience their own personal crises, and, in turn, stop saving for retirement or withdraw funds from their retirement plan accounts.

Ted Beal Jr., executive vice president with Equitable Advisors, says when a crisis happens—be it a personal loss of income or a spouse losing a job—“we see the innocence of people reacting to the moment.” People quickly turn to what they can do to manage their monthly cash flow and don’t realize the impact their actions may have, he says.

“It’s important to show the impact,” Beal says. “Plan sponsors don’t always do that, but it’s important to get that message through.”

Ed Farrington, head of retirement and institutional investing at Natixis Investment Managers, says retirement plan professionals spend a lot of time talking about the rate of return on investments, but with retirement planning, other things often have a greater impact. A person’s contribution rate, consistency in making deferrals and the length of time they contribute are of greater significance for account balances.

“So taking a break from contributing has a tremendous amount of impact,” he says. “Many folks were out of work so they couldn’t contribute, but some became scared and suspended contributions.”

In addition, Farrington notes that many participants took advantage of the greater loan and withdrawal provisions of the CARES Act—Natixis saw about three in 10 do so—which creates a long-term disruption in the ability to accumulate enough savings for retirement.

“When it came to contribution rates and tapping into savings, while much was driven by very real circumstances, for many people the reason was fear,” Farrington says. “Sometimes our own perceptions cause us to make mistakes. We all learn over time that patience and trying to avoid rash decisions can have a positive effect.”

Farrington adds that missing out on the days when the market goes up has an outsized impact on the ability to capture long-term returns.

“We owe it to participants to continue that message of contribution rate, consistency and time,” he says. “And we should tell participants not to let fear drive them to make decisions that have a negative impact. Understand that events change.”


Beal provides some scenarios that show how consistency in contributing to a retirement plan makes a difference to participant outcomes:

Scenario 1: “Jenny” started contributing $300/month at age 25. Assuming a rate of return on investments (ROI) of 6%, her account value at age 67 would be $684,453.30.

Scenario 2: Jenny started contributing $300/month at age 25 but stopped contributing at age 30. Then, at age 31, she restarted with the same $300/month contribution amount. Assuming the same 6% ROI, her account value at age 67 would be $652,376.95.

Scenario 3: Jenny started contributing $300/month at age 25 but stopped at age 30. Then, at age 35, she restarted with the same $300/month contribution amount. Assuming the same 6% ROI, her account value at age 67 would be $541,654.70.

Jenny's Account Values at Age 67

no break in contributions
one-year break in contributions
five-year break in contributions

Not contributing for one year reduced Jenny’s account value at age 67 by $32,076.35. Not contributing for five years increased the reduction to $142,798.60. The scenarios show how important it is to restart contributions as soon as possible, as well as the reality for many women who have to take an extended break from work due to caregiving responsibilities.

Eliza Guilbault, vice president on Fidelity’s Thought Leadership team, offers a scenario that considers not only a career break for a woman, but what happens if the woman dips into her retirement savings during the break to make ends meet.

Scenario: A woman, starting at age 50, making $100,000/year, takes a three-year career break and takes $40,000 out of her account in year one, another $40,000 out in year two, and yet another $40,000 out in year three (for a total of $120,000). She goes back to work at an 18% pay cut after the third year and continues to save (at a 9% deferral rate plus a 3% match) until age 67. This assumes a 4.5% real rate of return each year until age 67 and estimates the woman would have experienced a 1.22% real annual salary growth rate. It doesn’t account for any penalties or taxes that might apply to the distributions.

Account Balance at Age 67 Without Withdrawals

no career break
one-year career break
two-year career break
three-year career break

Account Balance at Age 67 With Withdrawals and a Three-Year Career Break

withdrawals at the beginning of each year
withdrawals at the end of each year

The difference between those two calculations occurs because the $40,000 would have participated in investment returns for the year if she took it out at the end of each career break. Guilbault’s scenario also demonstrates how retirement savers who take a break miss out not only on returns, but also on any employer match that is provided.

Brad Griffith, a financial planner at Buckingham Advisors, a registered investment adviser (RIA) in Dayton, Ohio, notes that while the CARES Act waived early withdrawal tax penalties for coronavirus-related distributions (CRDs), individuals still have to report the withdrawal as income when filing tax returns, although the law said they can do so over a three-year period.

“In addition to having a large tax hit, participants taking a distribution at that time would have unplugged the funds from investments and missed out on the rapid stock market recovery,” he says. “From March 31, 2020, to April 30, 2021, the S&P 500 rebounded about 62%, so those who took the maximum $100,000 distribution shortly after the passage of the CARES Act could have locked in a federal tax hit of up to $37,000 and missed out on over $62,000 in market appreciation.”

Adding in compounding, with an 8% assumed rate of return, the distribution would result in a $213,000 reduction in the participant’s account balance after 10 years, a $461,000 reduction after 20 years and a $996,000 reduction after 30 years, he says.

Helping Participants Catch Up

Employees who have taken a break from saving for retirement might not be able to restart at the same savings level, but they should start with something, and they can increase contributions later as their situations change, Beal says.

“Plan sponsors should also help employees understand that when they make a pre-tax contribution to their retirement account, they won’t see a decrease in pay at 100% of their savings level,” he says. “Reiterating that message every year will encourage people to save.”

Beal notes that employees may get busy and forget to restart their contributions or, for young people, think that retirement just seems too far off. “Using numbers to show how a little deviation early in life can have a tremendous impact will help employees jump back in,” he says.

Guilbault says plan sponsors should encourage employees who return from a work break or who have stopped contributing to their retirement plans to get right back into saving, but emergency savings may be the priority. “Plan sponsors should provide education about why having short-term savings is important, so employees won’t have to dip into their defined contribution [DC] plan again,” she says.

For those who can restart retirement savings contributions, Hu says plan sponsors should encourage them to defer enough to get the full company match, if one is provided.

“We also encourage automatic enrollment and increasing deferral amounts automatically,” Guilbault adds.

Hu suggests plan participants be given access to a financial adviser to develop a savings and investing plan.

Farrington says it is very difficult for participants to make up for lost time, but there are things they can do to make up some of it. “If someone feels better financially—jobs are coming back, vaccinations lead to less fear—they may start to ask, ‘Can I afford to contribute more?’ They can look at their budget and see if it is feasible,” Farrington says. “If the person is 50 or older, they should determine if they can avail of catch-up contributions. Some folks are unaware of the ability to contribute catch-ups.” The key, he says, is to act quickly and contribute more, and really prioritize retirement savings now.

Griffith and Beal say participants who are able to repay the CRDs back to their qualified plan accounts within the three-year period should do so to replenish their savings and get back on track for their retirement goals.

“Participants need to be encouraged to pay the money back if they are able so they won’t have a big tax bill,” Beal says. He suggests plan sponsors and participants work with recordkeepers to set up installments to repay the CRDs.

“There are no structured repayments as there are with participant loans. Participants have to stay on track with loans or they will default, but there was no guidance or mandatory time frame regarding paying back CRDs,” Beal says. “Plan sponsors should educate employees about coming up with some kind of payment schedule and work with their providers to make that efficient, whether through payroll deductions or self-payments.”

If participants can’t manage to make regular contributions and pay back distributions, Guilbault says contributing up to the maximum match rate should come first. “We encourage a total savings rate—employee plus employer contribution—of 15%,” she adds.

Re-establishing contributions might take baby steps, Beal says. Plan sponsors can remind participants to align their savings with the return of their cash flow.

Plan sponsors can also lean on service providers for guidance in helping participants reset, Beal says. Providers can offer illustrations to identify the potential loss of savings and provide easy ways to opt in. Plan design features such as automatic enrollment and automatic deferral escalation are other ways to help participants. “The more plan sponsors can make it easy for participants, the more likely participants will make the right choices,” he says.

Going forward, plan sponsors can also take a broader benefits approach to help employees avoid having to step out of the workforce. Guilbault suggests a benefits package that includes access to child care, family leave policies and employee assistance programs (EAPs) for mental health support.

“Some people took money out of their plan accounts to pay medical bills. If they had HSAs [health savings accounts], they could have used them,” she adds. “All benefits are related to financial well-being.”

Farrington says plan sponsors are increasingly understanding that holistic benefits help with retirement savings.

“It’s about the participant’s personal balance sheet. They can increase their assets, but if their liabilities are increasing at a faster rate, it is not helpful,” he says. “Employers can have a huge impact on an employee’s quality of life now and in retirement by offering financial wellness benefits, such as student loan debt help.”

Beal adds that it’s important to educate participants about taking loans and distributions and the effect that will have on their savings.