Why Low-to-Moderate Income Plan Participants are Bearing Brunt of the Recession

low to moderate income participants

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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.

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.”

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