Low- to moderate-income (LMI) retirement plan participants have mostly turned to reducing their spending levels and using credit cards to find financial relief during the pandemic; however, more will be turning to their retirement plans for liquidity, according to research from the nonprofit Commonwealth and the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center.

Seventy percent of LMI retirement plan participants have reduced their expenses. But, the researchers note, those making less than $30,000 are less likely to have cut expenses, perhaps because there is little room to reduce expenses in their budget. Fifteen percent of respondents have turned to credit cards to meet expenses during COVID-19.

The research found that, so far, few LMI 401(k) participants have tapped their accounts. Only 5% of respondents have withdrawn from their account, but 7% said they plan to do so in the coming weeks. Eight percent of people whose income has been reduced as a result of the pandemic have withdrawn from their account versus 2% of those with unchanged income.

The Coronavirus Aid, Relief and Economic Security (CARES) Act created a new type of distribution, called a coronavirus-related distribution (CRD), for employees affected by the pandemic and expanded retirement plan loan limits. A survey of 137 401(k) plan sponsors—with no reported limit on plan size or participant base—by the Plan Sponsor Council of America (PSCA) found nearly two-thirds (63.5%) are allowing participants to take CRDs. Only about one-third (36.5%) of respondents increased plan loan limits.

One in five plan sponsors (19.7%) surveyed by the PSCA are still taking a wait-and-see approach, and fewer than 10% have already determined they will not implement any of the optional CARES Act provisions.

Ascensus looked at its own retirement plan client base of plan sponsors with 500 or fewer employees, and found 11.7% have adopted the CRD option and 7.5% have adopted the expanded loan amount option. Ascensus found there has been 2.5 times the normal level of hardship distribution activity since the passage of the CARES Act, as retirement savers have begun taking CRDs. However, the overall number of savers taking CRDs remains fairly small at 12 per every 10,000, Ascensus reported.

The PSCA reports that among plans offering a CRD, nearly 40% indicated an average of just 1% to 5% of participants have taken one, and nearly as many said fewer than 1% of participants have done so. Eighteen percent reported that no participants have. Among plans that have increased the loan limits, most reported that fewer than 1% of participants have taken advantage of this option, and more than one-quarter stated that none have.

Among the more than 4 million participants on Alight’s platform who are eligible for the CARES Act provisions, 2.2% took a CRD, and 52% of those participants took the maximum amount allowed.

The Savings Picture

Five percent of respondents to the PSCA survey have suspended matching contributions and fewer than 1% have suspended non-matching (or profit sharing) contributions. Larger organizations were somewhat more likely to have suspended the match. Three percent of plan sponsors are considering reducing or suspending contributions but had not made a decision as of mid-June when the survey ended.

Ascensus’ look at plan sponsors with 500 or fewer participants found 11.8% of employers had stopped or decreased their match as of the end of May. The survey also found that 7.5% of employers that decreased their match in or after March returned to pre-March levels in May.

Ascensus found employer match or profit sharing contribution suspensions were driven by business interruptions or closures, and such suspensions happened in the smallest plans and in plans in certain industries more so than others.

The majority (93.1%) of participants made no change to their savings rates, and 3.8% increased their savings rate, according to Ascensus. However, 1.3% discontinued their retirement plan deferrals and 1.8% reduced their savings rates.

Commonwealth and the DCIIA Retirement Research Center note that data from 2008 indicates that when plan sponsors pause matches, 20% of participants also stop contributions. Its survey found that LMI plan participants are more likely to have paused or stopped retirement plan contributions (10%) than stopped paying bills (8%), borrowed from friends or family (7%) or sold any possessions (7%).