Despite Challenging Year, CRDs and Plan Leakage Were Sparse

Recordkeepers say they saw low uptake for coronavirus-related distributions and loans, a stark contrast from what was predicted when the CARES Act was passed in March.

When the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed in late March, just days after stay-at-home orders were mandated in states across the country, many in the retirement plan industry projected extensive withdrawal numbers and potential plan leakage.

“In the beginning, a lot of people were concerned,” recalls Dave Stinnett, principal of strategic retirement consulting at Vanguard. “There was a concern that there would be a lot of overuse or leakage.”

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The ensuing figures surprised Stinnett and his team at Vanguard, which reported low withdrawal activity from participants. Looking at data compiled through November, the firm found that out of the recordkeeper’s more than 5 million participants, just 5.3% took out a CARES Act withdrawal. The rest, about 95%, did not. Additionally, of those who claimed a coronavirus withdrawal, Vanguard’s figures showed the median amount of the withdrawal was $12,800. This is a significant figure, but far short of the limit. 

For those who did take a coronavirus-related distribution (CRD), Vanguard calculated the amount they would need to recover their long-term savings. On average, the team found that participants would need to increase their contribution levels by 1% for 2021. “Over the lifetime of their savings horizon, they should be able to fully mitigate the impact to their long-term savings,” Stinnett says.

Findings from Fidelity Retirement Services show comparable results. Just 5.7% of 401(k) and 403(b) plan participants claimed a withdrawal, with an average distribution amount of $9,600. “People were anticipating larger numbers, but, from what we saw, it was just about 6% here,” observes Eliza Badeau, vice president of workplace thought leadership for Fidelity’s retirement side. “We’re also seeing people just take out what they need. They’re not abusing the opportunity.”

T. Rowe Price experienced slightly higher withdrawal numbers, but they were still akin to those of Vanguard and Fidelity. According to Kevin Collins, head of retirement plan services at T. Rowe Price, in plans with assets greater than $25 million, 7.5% had taken at least one CRD through November. Of those who claimed a distribution, 21% took the maximum amount allowed.

As far as any accelerated trading activity for the year, Stinnett notes that while participant trading activity was slightly above normal levels, it wasn’t a drastic difference. Very few participants reacted to the market by moving money between funds, he says.

At T. Rowe Price, nearly 96% of participants did not make a change to their investments from the end of February to the end of May. Of those who did make changes, most of the movement was from equities to stable value or fixed income. Once the markets stabilized, the recordkeeper saw increased activity from stable or fixed income to target-date funds (TDFs) or equities, Collins says.

Badeau notes that there was recently a slight increase in CRDs, as more participants have fallen back on the provision in its last days before the December 30 deadline. “The pandemic has been going on longer than what people anticipated, so they’re turning to this option as a last resort,” she says.

On the loan side, T. Rowe Price found that 30% of plans with assets greater than $25 million had adopted an increased loan limit (ILL), but less than 1% of participants with access took advantage of the limit. Additionally, 57% of these plans adopted loan repayment suspensions (LRS), yet only 11% of participants with access used the suspension option. 

At Fidelity, 81,000 participants took a CARES Act loan, with the average loan amounting to $16,000.

Vanguard reported “modest” usage of loans among participants. “Most of the participants stayed to their long-term retirement savings plan and didn’t make changes, even in a year of significant market stress,” Stinnett says.

Distribution and loan figures were significantly different from what industry experts had anticipated, especially during a time when many participants were strapped for cash and without access to an emergency savings account. An Employee Benefit Research Institute (EBRI) study in August warned employers and participants about the short- and long-term consequences of using a CRD as an emergency savings account.

Yet those who did have a savings account dedicated to emergencies were half as likely to tap into retirement funds as those who did’t have one, according to a report by Commonwealth and the Defined Contribution Institutional Investment Association (DCIIA)’s Retirement Research Center. The study found that low-to-moderate income respondents, with less than $2,000 in liquid savings, were twice as likely to have taken a 401(k) loan or hardship withdrawal in response to COVID-19 than those with more than $2,000 in liquid savings.

“Emergency savings plays a critical role for those who have it,” says Catherine Wright, a senior innovation manager at Commonwealth. “The pandemic has really demonstrated how critical these savings are. I imagine we’ll be seeing more professionals offering emergency savings through the employer channel in the future.”

As the industry processes the effects of COVID-19, more employers and retirement professionals are enacting emergency savings features and education in their financial wellness programs. A recent T. Rowe Price study projects implementing more financial knowledge and opening access to savings account education will be top trends throughout 2021.

At T. Rowe Price, Collins says the company is training its contact center associates and has created a participant education digital hub, efforts that strive to give participants insights on legislative developments, resources for keeping retirement savings on track during market volatility and guidance on financial wellness. “Effective participant communication and education is imperative to driving successful retirement outcomes and ensuring participants can get back on track,” he says.

A Conversation With a Union Pension Funding Advocate

One outspoken advocate for the Butch Lewis Act says the time is ripe for addressing the funding challenges faced by union sponsored multiemployer pension plans.

Russell Kamp, managing director at Ryan ALM, recently sat down for a wide-ranging discussion with PLANSPONSOR in which he spoke in no uncertain terms about the need to immediately address the union multiemployer pension funding crisis.

For context, Ryan ALM’s stated mission is to solve liability-driven problems faced by pensions and other institutional investors through the provision of “low-cost, low-risk solutions.” Additionally, Kamp himself was on the team of government and industry professionals that drafted the Butch Lewis Act. That legislation would, among other features, provide funds for 30-year loans and new forgivable financial assistance, in the form of government grants, aimed at supporting the most financially troubled multiemployer pension plans.

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As Kamp recalled, it was about a year and a half ago that the Ways and Means Committee of the U.S. House of Representatives marked up and voted along party lines to advance the Butch Lewis Act, which is formally titled the Rehabilitation for Multiemployer Pensions Act. About two weeks later, the full House approved the legislation in a 264 to 169 vote. That tally meant 29 Republicans—nine of whom co-sponsored the legislation—joined Democrats in voting for the measure. In Kamp’s estimation, this was one of the more solid shows of bipartisan seen during this Congress prior to the passage of the coronavirus stimulus package early this year.

“Sadly, getting this legislation through a Republican-controlled Senate seems next to impossible,” Kamp said. “This is a real shame. Failure to support these critically important pension systems jeopardizes the economic future for more than 1.3 million American workers and retirees.”

Kamp said he understands that people may have impassioned views about why some—though certainly not all—union pensions are so financially stressed. He agreed, for example, that it would be helpful to mandate more conservative accounting and return-projection standards for union pensions, akin to those required for single-employer pensions. However, he said, everyone should be able to agree that simply allowing these plans to fail and be taken over by the government’s already cash-strapped Pension Benefit Guaranty Corporation (PBGC) insurance program is not a good solution. Indeed, just this week, PBGC reported its multiemployer pension insurance program will become insolvent by fiscal year 2026, short of significant congressional action.

“Such a ‘pay-as-you-go’ approach will necessarily be costlier and messier than the solutions in the Butch Lewis Act,” Kamp said. “The bill is proposing a $64 billion loan package to be spent over 10 years. This seems a drop in the bucket given the estimated federal fiscal year budget deficit for 2019, which is estimated to be $1.09 trillion, while 2020’s budget shortfall will grow an estimated 1% on top of that figure.”

While Kamp said he is glad to see lawmakers on both sides of the aisle contemplating this challenge, he noted he is not necessarily a fan of the solution that seems to be favored by at least some Senate Republicans, including Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Senate HELP [Health, Education, Labor and Pensions] Committee Chairman Lamar Alexander, R-Tennessee.

In simple terms, to help the “sickest plans” recover their financial footing, the Republican proposal creates a special “partition” option for multiemployer plans. According to the senators, partitioning permits employers to maintain a financially healthy multiemployer plan by carving out pension benefit liabilities owed to participants who have been “orphaned” by employers that have exited the plan without paying their full share of those liabilities. They argue that removing orphan liabilities allows the original plan to continue to provide benefits in a self-sustaining manner by funding benefits with contributions from current participating employers.

Kamp suggested this proposal has some points of merit, but he believes its fatal flaw is that it seeks to put too much of the “shared sacrifice” of solving the union pension funding crisis on the backs of the so-called orphaned participants and beneficiaries.

“It is certainly true that this group of orphaned participants is causing serious financial strain on union pensions, but it is not due to any fault or action of their own,” Kamp said. “These are people who worked hard and have contributed their fair share to the plans, and so to single them out this way is unacceptable, in my view.”

Kamp said the Butch Lewis Act is a better solution because it builds on the proven (though sometimes controversial) concept of pension obligation bonds (POBs). He noted that he has written extensively on the topic in his blog, as the issue rather quickly gets technical.

“Our appreciation for POBs is predicated on the fact that the proceeds from the bonds must be used appropriately,” he emphasized. “To be fair, POBs have had a checkered history, as many of these instruments have been issued at the peaks of market cycles.”

As Kamp has covered, compounding the problem of POBs being issued at poor times has been the fact that the proceeds have been invested in “traditional” asset allocations.

“The thinking was that there exists an arbitrage between the cost of the bond, or its yield, and the return on asset [ROA] assumptions,” Kamp said. “By investing the assets that cost 4% or 5% to borrow in an asset allocation with an assumed 7.25% ROA, the plan would ‘capture’ this differential. But, as I mentioned previously, these instruments were often brought to market at the peak of an investing cycle, dooming the implementation from the start.”

Kamp said he feels the current environment is the right one in which to confidently issue POBs to save stressed union pensions. He said the right approach is to calculate what it would cost a given pension plan to “defease” the retired lives liability (RLL). Once that amount is determined by the plan’s actuary, it becomes the amount that should be borrowed in the bond offering.

“When the proceeds from the POB become available, the plan should immediately use those funds to defease the RLL through a cash flow matching bond portfolio,” Kamp explained. “This action will ensure that the promised benefits are paid. The current assets in the fund and any future contributions can now be invested in a more aggressive implementation, as they are no longer a source of liquidity.”

Kamp said this approach can help dramatically improve the funded status of stressed pensions, while enhancing liquidity to meet benefit payments. Other potential benefits are a likely greater allocation to risk assets, a longer investing period that protects the fund during choppy markets, and more stable contribution expenses.

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