The COVID-19 pandemic is having a lasting negative financial impact on many low- to moderate-income (LMI) defined contribution plan participants.
New research, posted in a Dec. 8 Commonwealth blog, finds that LMI plan participants, defined as those with $20,000-$75,000 in annual household income, are struggling financially, and income loss persists for the 1 in 3 respondents that lost income due to the pandemic.
To understand how LMI plan participants are managing the pandemic’s impact to their financial security and retirement savings, Commonwealth has partnered with the Defined Contribution Institutional Investment Association’s (DCIIA’s) Retirement Research Center on a series of surveys. The third and most recent survey was fielded between Sept. 18 and Sept. 28, just over two months after the second survey.
Although the CARES Act pointed Americans to their retirement savings as a source of liquidity, for many of the most vulnerable, their retirement plan is not enough to cover months of lost income: of the quarter of respondents who did not have emergency savings heading into the pandemic, almost half (47%) have less than $10,000 in their workplace retirement plans. For context, $10,000 is less than two months’ worth of expenses for the average American household.
Here are three key findings about LMI retirement plan savers from the latest research, and the role emergency savings are playing during COVID-19.
- Those with emergency savings are half as likely to tap retirement savings: Respondents with less than $2,000 in liquid savings are twice as likely to have taken a 401k loan or hardship withdrawal in response to COVID-19 than those with more than $2,000 in liquid savings (10% vs. 5%). Respondents who have lost income since Feb. 1, 2020, are also more likely to have taken a loan or withdrawal (10% vs. 4%), as are those who have not saved for emergencies since Feb. 1 (10% vs. 5%), a finding consistent with the second survey’s findings.
- Among LMI plan participants, there has been little recovery in lost income: About a third of respondents had income lower than pre-pandemic levels in every month from April through September. Unfortunately, respondents reported consistently lower income with no significant improvement at any point since the start of the pandemic: the same percentage of respondents had lower income in September as the percentage in April. This finding aligns with evidence of a K-shaped recovery as LMI Americans continue to bear the brunt of the recession while higher income Americans have recovered from their job loss.
- Liquid savings are dwindling, particularly for respondents with less than $50,000 in household income: More respondents in the third survey have less than $500 in liquid savings (11% in September vs. 7% in the July survey). This trend is especially strong among lower earners: 16% of respondents with $20,000-$50,000 in household income have $500 or less in liquid savings, compared to 10% in the July survey, while savings among respondents with $50,000-$75,000 in household have stayed steady. More respondents across all income brackets also report having withdrawn from their emergency savings since Feb. 1: 55% of all active savers, versus 43% in the July survey.
As the survey shows, Americans are still suffering: many respondents have not made up the income loss they experienced early in the pandemic, and they are drawing down on their emergency savings. For the financially vulnerable, retirement accounts cannot cover prolonged periods of lost income: respondents who do not have emergency savings also have little in retirement savings.
The Commonwealth blog goes on to say that the survey also demonstrates that immediate support is needed for LMI Americans who are most impacted by the pandemic. Survey respondents are experiencing prolonged decreases in income and their liquid savings are dwindling. With unemployment insurance ending for millions of Americans at the end of December and a new wave of lockdowns could further fuel the unemployment crisis, the blog says Congressional action is critical.
Finally, this survey provides further evidence that emergency savings enables financial resiliency and preserves retirement savings for their intended purpose.
“When we turn the corner on this pandemic, providing easy, accessible, low-to-no fee options for LMI Americans to save for emergencies will be an essential step in rebuilding their financial security,” the blog post concludes. “Policymakers cannot go back in time to offer the right tax-advantaged short-term savings account to prepare for this crisis, but they can support LMI Americans in saving for the next one.”
SEE ALSO:
- Did Coronavirus Relief Help DC Participants Continue Saving?
- Survival Mode: Where 4 in 10 Americans Say They’ll Be Financially in 2021
- Pandemic Forcing 29% of 401k Participants to Ponder Early Withdrawals
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
