Few use CARES Act to tap retirement savings

After the CARES Act was signed into law at the end of March, retirement plan sponsors prepared for an onslaught of COVID-19-related distributions and loans to employees hard hit by the pandemic. But few plan participants have exercised their options to tap retirement plan savings under the new relaxed rules, according to two new reports.

The CARES Act allows individuals to borrow or withdraw 100% of their vested account balance up to $100,000 — twice what participants have typically been allowed to borrow from their employer-provided retirement plan in the past. The increased loan amounts are available through Sept. 22, and the corona-related distributions, or CRDs, are available through Dec. 30.

There is no 10% early withdrawal tax penalty for individuals who take a CRD before age 59½, and the tax owed on the distribution can be paid over three years. Both loans and distributions can be paid back into the retirement accounts.

Individuals who have been diagnosed with COVID-19 or whose spouse or dependents have been diagnosed with the virus are eligible for the CARES Act loans and distributions. In addition, people who are have experienced adverse financial consequences from the pandemic as the result of a reduction in work hours, layoffs, quarantines or furloughs, or who are unable to work due to a lack of childcare or a business closing are also eligible for easy access to their retirement savings.

At the beginning of the pandemic, more than 40% of workers said they might need to tap their financial accounts as a result of the economic crisis and market volatility, according to a Principal survey conducted in March as businesses shut down around the country, triggering record-high claims for unemployment benefits and forcing people to quarantine at home.

Of the survey respondents who expected to need cash, 15% said they would use their emergency savings and 13% said they would take a distribution or loan from their retirement account. In reality, fewer people appear to have dipped into their long-term savings.

“We were prepared for authorizing loans and disaster withdrawals, but the response was very small,” said Jerry Patterson, senior vice president of retirement and income solutions at Principal. “We didn’t see any movement throughout this whole period that involved more than 2% of participants.” Principal provides employer-based retirement savings plans to more than 8.2 million participants.

In addition, less than 1% of plan sponsors have reduced or stopped their employer match, Patterson said.

“Initially there was a blip in hard-hit industries such as retail and travel,” he said. “Today, things have normalized.”

Similarly, Vanguard, one of the largest retirement plan providers, found that very few plan participants initiated a coronavirus-related distribution or a loan under the CARES Act's expanded loan limit.

After the passage of the CARES Act, Vanguard provided plan sponsors with an election form to select the provisions they wanted to implement. As of the end of April, nearly 60% of sponsors had returned the form. Nearly all — 99% — of the plans allowed for CRDs, and the majority extended the provision to all participants, including current and former employees. Two-thirds (67%) adopted the expanded loan limits.

But the use of loans and withdrawals remains low. Less than 1% of participants have initiated a CRD and the average distribution was $19,000, according to a Vanguard report, “The CARES Act: One Month Later.”

Less than 0.1% of participants initiated a loan under the CARES Act’s expanded loan limits, according to the Vanguard analysis. Of those loans, 20% totaled more than $50,000, which was the previous maximum on 401(k) loans prior to the passage of the emergency legislation.

In addition, about 3% of participants who otherwise would have been required to take a required minimum distribution in 2020 have delayed, as allowed under the CARES Act, according to Vanguard.

“We are heartened by early data showing that while a majority of plans have adopted optional provisions allowing for greater access to retirement savings, the vast majority of participants have not exercised that flexibility,” the Vanguard analysis said. “However, we will continue to monitor plan activity and expect to provide more extensive insights in the months to come.”

Although millions of Americans have been laid off or terminated during the economic crisis, millions of others never stopped working.

“These investors may have the biggest second chance of a lifetime,” Patterson said.

The steep market declines and subsequent rebound have given people a chance to review their financial plan and to ask themselves if they have sufficient emergency savings, whether their investments are properly allocated and how they will create reliable retirement income in the future.

[More: More companies may cut 401(k) matches]