How COVID-19 Is Changing Retirement Plan Savings
Borrowing Money from Retirement Funds
One-third of active pension plan participants have borrowed money from their retirement plans have resulted from COVID, according to a 2020 report by Edelman Financial Engines. Up to 60 per cent of these borrowers may dip into retirement funds again if needed, and an additional 10 per cent are evaluating whether to take a loan or hardship withdrawal. Despite these actions, 55 per cent of borrowers later regretted their decision to borrow. Many borrowers said they did not understand the tax and penalty implications.
The Internal Revenue Service (IRS) issued COVID Tax Tip 2020-85 on July 14, 2020. In the release, the IRS advises that qualified individuals affected by COVID-19 may be able to withdraw up to $100,000 from their eligible retirement plans, including IRAs, between January 1 and December 30, 2020. These coronavirus-related distributions are subject to regular tax but not the 10 per cent additional tax on distributions. Funds must be repaid in three years. Specific qualifications must be met. Plan participants will want to speak with their tax advisor and plan sponsor for further details.
While making it easier to borrow against retirement savings, the U.S. government also fosters longer-term savings. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019, just before the emergence of COVID. For those pension plan participants who have some financial flexibility, the SECURE Act provides that required minimum distributions (RMDs) from 401(k) and defined contribution plans can be deferred to age 72, rather than 70 ½.
Early Retirements Due to COVID-19
A September 2020 survey by pension consulting firm Simply Wise reports that 10% of Americans in their 50s and 60s now plan to retire earlier than expected. In many cases, this is triggered by a COVID-related job loss. They also report that more than a quarter of 401(k) plan participants consider accessing their pension savings early to meet financial obligations.
A national survey of educators conducted by the National Education Association in August also reports that many teachers plan to retire early or seek new employment due to COVID. The majority of teachers surveyed with 30 or more years of teaching experience (55 per cent) plan to leave the profession. This compares to 20 per cent of teachers with fewer than ten years of experience and 40 per cent of educators who have been teaching for two or three decades.
The COVID pandemic is pushing an expected four million older workers out of the workforce and into an unplanned early retirement, according to an August 2020 report by Forbes Magazine. This translates into a 7 per cent job loss for workers aged 55 to 70, compared to a 4.8 per cent reduction for workers under age 55. These early retirements shorten the time that workers would otherwise have to continue saving for their future.
Pension Contributions Post-COVID
According to research reports from Fidelity Investments and T. Rowe Price, most 401(k) plan participants maintain their pension investments despite the market turmoil accompanying the COVID-19 pandemic.
Fidelity reported in August 2020 that 9 per cent of 401(k) investors increased their contribution rate, while only 1 per cent stopped their contributions. T. Rowe Price reported in October 2020 that fewer than 10 per cent of participants in their pension plans either stopped or cut back on pension contributions.
On a related note, Fidelity also reported that only 11 per cent of pension plan sponsors cut back on their 401(k) contribution program that matches employee funds typically for the first 2-3 per cent of participant investments.
Lost Jobs Disrupt Pension Savings
There is not much data available on the number of workers who have lost corporate-sponsored pension benefits due to COVID. Nevertheless, the Society for Human Resource Management (SHRM) acknowledges that millions of laid-off workers may no longer have access to automatic deductions and employer matches offered by corporate pension plans.
As a result, many workers will need to work longer to save for retirement. Some will also need to borrow against retirement funds while they try to rebuild financial security.