There was some nervous activity among defined contribution plan participants in the first three quarters of 2020, according to a report by the Investment Company Institute, but for the most part, participants left their money where it is. Just 3.4% of participants took a withdrawal, compared to 3.3% for the same period last year. Hardship withdrawals actually fell slightly, dropping from 1.6% in the first three quarters of 2019 to 1.2% in the first part of this year.
Related: Few DC Plan Participants Withdrew Funds in 2019, ICI Finds
Meanwhile, only 2.2% of participants stopped contributing to their plans, compared to 1.9% in the first three quarters of 2019. ICI noted that it’s “possible that some of these participants stopped contributing simply because they had reached the annual contribution limit.”
However, ICI notes that participants did take advantage of coronavirus relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The organization found that 4.4% of participants took a coronavirus-related distribution (CRD), which, unlike hardship withdrawals, are not subject to the 10% early withdrawal penalty and can be paid back within three years. ICI notes that over 40% of plan sponsors allow CRDs, and almost half allow participants to repay distributions.
CRDs seem to have prevented some participants from taking loans from their 401k plans, according to the report. Loan activity fell throughout the early part of 2020, from 16.3% at the end of March to 15.6% three months later and 15.4% at the end of September.
“Generally, two factors appear to influence DC plan participants’ loan activity: reaction to financial stresses and a seasonal pattern,” ICI noted. The number of outstanding loans tends to be lower in the first quarter of the year.
“Loan activity in 2020 has not followed that seasonal pattern, as the percentage of DC plan participants with loans outstanding has edged down in 2020:Q2 and 2020:Q3, perhaps partly reflecting the use of CRDs instead of loans,” according to the report.
Asset allocation
Participants were more apt to change their asset allocations than take withdrawals. The report noted that 9.5% of participants changed the allocations of their balances in the first three quarters, and 5.6% changed allocations of their contributions. These are up quite a bit from last year, when 7.1% of participants changed their balance allocations and 4.2% changed the allocation of their contributions.
Related: 401ks and COVID-19: What Consumers are Hearing from Financial Experts
Comparison to the Great Recession
The report compared participant behavior this year to what happened in the first nine months of 2009:
- Took a withdrawal (not including CRDs): 3.4% in 2020; 2.6% in 2009
- Took a hardship withdrawal: 1.2%; 1.3%
- Stopped contributions: 2.2%; 5%
- Changed balance asset allocation: 9.5%; 9.9%
- Changed contribution asset allocation: 5.6%; 9.8%
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