Retirement plan “leakage” is rearing its ugly head again thanks to hardships brought on by the trainwreck of a year that is 2020.
A new study by Secure Retirement Institute (SRI) finds American workers who lost their jobs or experienced a drop in income due to the COVID-19 pandemic were at least twice as likely to take money from their retirement accounts as those who weren’t impacted.
SRI surveyed more than 1,400 U.S. non-retired households with qualified retirement savings accounts and found almost half (49%) had experienced a reduction in work income (through job loss or decrease in hours and/or a pay cut). These households were understandably more likely than those not directly affected to access their retirement plan balances.
This finding was consistent across emergency savings levels and for all four types of leakage examined. Overall, CARES Act withdrawals from IRAs were used most frequently, regardless of whether the household was impacted by COVID-19-related work income reductions.
Part of the reason workers—both those whose income was negatively impacted by the pandemic and those unaffected—needed to access their retirement accounts was the general lack of emergency savings. More than a quarter of U.S. workers (26%) say they only have emergency savings to cover less than one month’s expenses and nearly half (48%) report having only enough emergency savings to cover three months’ expenses or less.
“Emergency savings represent the first line of defense for households experiencing a financial shock, such as major unexpected expenses or the loss of a job,” said Matthew Drinkwater, Ph.D., corporate vice president and SRI research director. “In theory, these savings will be tapped before touching any long-term savings, including funds in retirement savings accounts. The lack of emergency funds and the staggering job loss that occurred over the past few months, due to the COVID-19 pandemic, will have long-term ramifications on retirement security for many Americans.”
While the vast majority of households with retirement savings haven’t accessed their qualified retirement savings accounts since the pandemic outbreak, the study reveals households with larger emergency savings funds are less likely to tap into their retirement savings than those with less emergency savings. In particular, households with emergency savings capable of covering more than a year of expenses are very unlikely to have tapped their retirement savings. This is true regardless of household wealth.
Retirement account leakage is a significant issue in normal times. According to a Government Accounting Office report, an estimated $69 billion is withdrawn from qualified retirement savings accounts each year by individuals age 25 to 55. DC plan providers trying to reduce the incidence of leakage should be encouraging employers to offer basic savings accounts along with their DC plans, and to promote additional savings for emergencies, even though such accounts may divert some plan contributions.
SEE ALSO:
- 401k Cashout Leakage is Real, Not a ‘Narrative’
- Protecting Retirement Savings with Emergency Funds
- Emergency Fund Assistance High on Employers’ Priority List
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.
