One year ago, there was already troubling news about how little Americans had saved for retirement. Then the pandemic descended, multiplying those concerns.
Local and national governments attempted to help with the immediate needs of citizens who, on a grand scale, suffered sudden job losses. The CARES Act paved the way for people to take money from a source intended only for retirement; with a stroke of the pen, they could borrow and receive distributions from their retirement accounts without the carefully crafted penalties that had previously discouraged early withdrawals. Industry professionals and plan sponsors held their collective breath, worried about a flood of cash leaving plans — which, along with the anticipated suspension of contributions, could leave future retirees financially decimated.
As time passed, everyone began to breathe again, realizing that the vast majority of plan participants did not withdraw retirement funds. Nor was there a wholesale move to suspend contributions, either on the part of companies or participants. Still, the virus leaves some big questions, like what will be the long-term impact on participant saving behaviors?
The answer is unclear, according to a new paper from T. Rowe Price, How the Coronavirus Pandemic is Affecting Retirement Saving. However, there may be insights to gain from looking backward. Armed with data stemming from the 2007–2009 global recession, plan sponsors and financial professionals may be better prepared to help participants navigate their way ahead toward financial wellness — and therefore a better retirement.
T. Rowe Price asserts that, although the percentage of participants who took advantage of CARES Act provisions was small, the impact of their actions will be far-reaching. Of those who took a coronavirus-related distribution, 21% took the maximum allowed, the lesser of $100,000 or 100% of their vested account balance.
As they analyzed data from the earlier financial crisis, T. Rowe Price found that people who were then working tended to retire at a different time than they had planned, due to factors outside their control such as health, job loss or unexpected financial need. Concerns about affording retirement continue to plague all generations; one-third of today’s workers surveyed report concern they will have to reduce their standard of living in retirement.
The pandemic highlights the need to continue educating employees about financial wellness. People who have emergency savings are better able to ride out even the kind of significant disruption wrought by COVID-19. Employers are in a unique position to help, by working with their financial professionals to provide the needed education. Between 40% and 60% of those surveyed by T. Rowe Price said they are interested in learning from their employer or plan professionals how to set and meet financial goals. And 62% of 401(k) plan participants said they look to the company that manages their plan to help them achieve financial goals, including debt reduction, college education and day-to-day expense management along with saving for retirement.
Click here to read The T. Rowe Price Insights on Retirement contains more information that may help you set a strategy to improve plan results.