Benefits August 3, 2020

EBRI Says CARES Act Distributions Could Have Lasting Consequences

The report highlights how a loan or distribution option under the CARES Act can affect employees.

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An Employee Benefit Research Institute (EBRI) study has found that taking withdrawals under the Coronavirus Aid, Relief and Economic Security Act (CARES) Act can have damaging effects on workers who fail to repay them, especially those in older age groups.

While those who fully refund their coronavirus-related distributions (CRDs) are projected to see minimal impact on their future retirement security, those who do not repay the distribution face the possibility of significant reductions in their retirement balance.

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The report offers four scenarios, each painting a different impact in taking out a CRD.

The first includes a one-time full withdrawal—up to $100,000—with a three-year payback, which resulted in a median reduction rate in retirement balances of 2.3%. However, that figure more than doubles, to 5.8%, for older workers ages 60 to 64.

The second scenario is one in which a worker takes a full distribution but instead of repaying it over the course of three years, does not pay back the withdrawal at all. In this scenario, the EBRI report finds the median reduction skyrockets to 20%, and again more than doubles for older workers, at a 45% reduction rate in retirement balances. This rate is cut in half to 10% for younger workers, most of whom have account balances that are too small for a full distribution.

In the third setting, the report assumes that every dollar used to repay the CRD will result in a dollar reduction toward new contributions to the defined contribution (DC) plan account. This results in a median reduction of 5.9% overall, and an 8.8% reduction for workers ages 55 to 59, and 5.5% for those 60 to 64.

The last situation shows a more draconian scenario, as the report notes, in that an employee takes on a full CRD in 2020 and further does so every 10 years thereafter with no payback. This scenario represents a potential national or global crisis, such as the current pandemic or the 2008 recession, that occurs every 10 years. In response to these crises, policymakers would relax withdrawal provisions within DC plans, says the report. Such a scenario concludes with the highest reduction rate of the four scenarios, at 54%—a loss of more than half of retirement account balances. According to EBRI, at this point, the median reduction rate no longer increases with age as with the other scenarios, since the number of withdrawals is larger for younger participants.

Jack VanDerhei, EBRI’s director of research and author of the report, explains that the study warns about the consequences of using DC plans as an emergency savings account, all while highlighting further examination of the loan provisions. “While the CARES Act provisions provide much-needed liquidity for cash-strapped workers during the current pandemic, this study strives to assess how using defined contribution plans as emergency savings impacts the future retirement security of American workers,” he states. “However, further examination is needed. Under a scenario in which estimated actual implementation and utilization of CARES Act provisions is low, the aggregate impact is estimated to be less than one-half a percent in the scenario in which employees fail to pay back CRDs. But that could change if more employers choose to implement provisions or if allowing access to retirement funds with no penalty becomes a more commonplace and relied-upon response to emergencies.”

The report makes it a point to add that employers would have had to offer these provisions in their plan, with employees requiring approval before taking out such a distribution. The CARES Act distribution and loan provisions have been met with several reviews since their introduction. And plan sponsors have considerations to understand before implementing loan options.

Investing August 3, 2020

Volatility Brings Focus on Sustainable Retirement Income

Participants are looking to their employers to offer a retirement income solution, while interest in ESG investing among retirement plan participants continues to increase.

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American Century Investments surveyed retirement plan participants in March, just when the coronavirus pandemic was taking hold, and discovered that market risk was participants’ biggest concern, cited by 40% of participants.

“They were reacting to the extreme market volatility we were seeing at that time,” Diane Gallagher, vice president, value add, at American Century, tells PLANSPONSOR. “By comparison, in the 2019 survey, longevity risk was their biggest concern. This speaks to how important it is for plan fiduciaries to look at all of the elements of risk.”

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Another 40% are worried about running out of money in retirement, the survey found.

In a separate analysis, PGIM says another risk to participants caused by the coronavirus is interest rate risk. “There is basic market risk, and then there is inflation risk, and, of course, longevity risk,” says Josh Cohen, head of institutional defined contribution (DC) for PGIM. “In this current situation, I think we are seeing one underappreciated risk come to the fore—and that is interest rate risk.” Cohen notes that because government bonds and high quality corporate bonds are paying very little, it is expensive to fund a guaranteed stream of income in retirement.

In addition, in spite of the market’s rebound since March, LPL Financial says there is significant downside risk in the U.S. and global equity markets. The firm says stocks are overvalued and that the recovery may not be V-shaped, as many have predicted.

Jeff Buchbinder, equity strategist at LPL Financial, says “Stock market weakness [has] caused investors to ask whether the long-awaited market pullback may be at hand. … We have been expecting this rally to take a breather since COVID-19 cases began to accelerate in June and some reopenings in Sunbelt and California hotspots were rolled back to combat the spread of the virus.”

American Century’s survey also found that participants are looking to their employers to offer a retirement income solution, and interest in environmental, social and governance (ESG) investing among retirement plan participants continues to increase.

Eighty percent of participants said they were more likely to keep their assets in the plan once retired if their employer offered retirement income solutions.

“Clearly, there is a strong preference for leaving assets in the plan at retirement and taking withdrawals from the plan to fund retirement,” Gallagher says. “Investment solutions offering a retirement income stream provide plan participants with peace of mind after leaving an employer.”

Seventy-five percent of participants said they would like their employer to offer holistic financial advice, and the majority would like their employer to automatically defer them at a rate of 6% of their salary or higher, a significant increase from last year.

One in eight participants work for a company that offers ESG investments. Men are more interested in an ESG option than women, and those earning $100,000 or more are more keenly interested in ESG investing, American Century found.

Gallagher says she is not surprised about the growing interest among retirement plan participants in ESG investing, as she says it is gaining interest on a “societal level,” adding: “As ESG investing is increasingly applied in investments, it will be important for plans to understand ESG and implications for plan investments.”

The American Century study also found that participants with $500,000 or more in assets are more likely than those with less than $100,000 in assets to be worried about the ability to afford health expenses. And men are more likely to select growth risk as the risk that concerns them most, while women are most concerned about longevity risk.

Nearly all participants say that retirement savings is an important goal, which Gallagher attributes to the excellent job that plan sponsors have done in the past decade of emphasizing the importance and responsibility of plan participants to take charge of their future.

Participants are more concerned about paying off debt this year, and Gallagher says the recent trend of sponsors embracing holistic financial wellness programs should help on this front. Seventy percent support automatic deferral rates of 6%. Sixty percent feel more positively about a company that not only automatically enrolls participants, but combines that with automatic escalation and target-date funds (TDFs) as the qualified default investment alternative (QDIA). Nearly 80% would like their employer to encourage them to save more. Gallagher says this finding is consistent with previous years.

Finally, a majority prefer a company match over a salary increase.

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