CARES Act’s Provisions Are Well-Intentioned but Could Harm Retirement Readiness

On March 27, President Donald Trump signed into law the Coronavirus Aid, Relief and Economic Security (CARES) Act, the U.S. government’s massive fiscal stimulus package designed to mitigate the economic impact of the COVID-19 pandemic. The CARES Act includes provisions related to the premature withdrawal of retirement plan assets which, while well-intentioned, could cause significant harm down the road for future retirees. Plan sponsors should harness the CARE Act’s passage as an opportunity to review content for participants about early withdrawals and update such content to discourage participants from making a decision which can greatly reduce their income in retirement.

Current State of Retirement Plan Leakage

Current retirement plan regulations limit in-service withdrawals of retirement plan assets to loans—maximum $50,000—and hardship withdrawals, if allowed by the plan. When a worker changes jobs, participants can cash-out retirement savings account balances, but will have to pay taxes on the amount withdrawn and an additional 10% penalty if the withdrawal takes place prior to age 59 1/2. This leakage from the U.S. retirement system makes a significant impact on retirement outcomes for participants. On an aggregate basis, the Employee Benefit Research Institute (EBRI) estimates that if leakage were plugged through the automatic portability of retirement savings from one plan to another as participants switch jobs, up to $2 trillion in retirement assets would be retained over the course of 40 years. The EBRI figures are present-valued or in today’s dollars. On an individual basis, the Center for Retirement Research (CRR) at Boston College estimates that leakage reduces account balances by 25% on average.

Leakage Under the CARES Act

Under the CARES Act, participants can remove as much as $100,000 from retirement accounts without being subject to penalties, simply by informing the plan recordkeeper that they are “experiencing adverse financial consequences” due to COVID-19, or facing a personal/household COVID-19 diagnosis. Withdrawals must be made by December 31, 2020, and taxes on them would be due in three years’ time. In addition, the maximum amount for loan-related withdrawals doubled under the CARES Act to $100,000.

As demonstrated by the fact that 10 million people have filed for unemployment claims over the last two weeks ending April 3, the coronavirus-driven shutdown of the U.S. economy has created a dire need for liquidity. The CARES Act opens up retirement plan assets as a source of emergency funds for everyday Americans.

But short-term needs shouldn’t eclipse long-term goals and planning. Most plan participants still have the benefits of time and continuous paychecks—both of which disappear in retirement. That’s why retirement savings should be used as a last resort for meeting emergency expenses after all other alternatives, such as government assistance and borrowing, have been exhausted.

Plan Sponsors Have the Power to Prevent Participants from Making a Huge Mistake

Now more than ever, in these anxious and uncertain times, plan sponsors’ participant-facing messaging on appropriate saving habits and decision-making is vital. It can be understandably difficult to find time for preparing and distributing this content when other human resources (HR) and benefits activities related to the pandemic are more pressing.

However, participants may be tempted to access retirement balances based on phony and misleading offers during this time. Sponsor resources that educate participants on the damage cash-outs can inflict on their income in retirement can prevent them from being taken in by false promises. On the morning of April 3, while listening to a radio station in San Francisco, I heard an ad for a real estate investment trust encouraging people to withdraw up to $100,000 from their retirement funds, as per the CARES Act, and invest with it for a 10% return as a way to earn back money lost in the market downturn.

A simple reminder to participants that, while the CARES Act may open up retirement balances as sources for emergency funds, there are other resources that should be leveraged first. And furthermore, by no means should the CARES Act be used as a justification to withdraw balances from their retirement plan accounts to invest elsewhere.

As the old adage reminds us, this too shall pass. But the harm to retirement outcomes may be permanent if participants succumb to the temptation to make destructive decisions. A simple, timely message from plan sponsors can protect participants from diminishing their retirement prospects.

Neal Ringquist is executive vice president and chief sales officer of Retirement Clearinghouse, a portability solutions provider.