Few things have had as sudden and dramatic an impact on the lives of individuals and the health of the global economy as the coronavirus pandemic. Seemingly overnight, our daily routines are upended, our financial well-being is called into question, and fear is giving hope a run for its money.
Governments around the world have aggressively stepped in to address the health and economic consequences of COVID-19. Trillions of dollars in new spending have been approved to support the economy and fund urgent healthcare needs.
At the same time, rules have been relaxed to give businesses and individuals greater flexibility to navigate the overwhelming uncertainty. With millions of Americans wondering how they will pay the rent or mortgage, some have turned to whatever retirement savings that they may have available out of necessity.
The CARES Act provides stimulus payments to individuals and businesses, but it also includes several provisions that permit individuals to tap into those retirement savings more easily now, without many of the usual penalties. While that meets the needs of the present, policymakers must understand the long-term implications of this approach.
It must be made just as easy to replenish those retirement savings when we get to the other side of the current crisis as it is to cash in those accounts to make it through these challenging times. At the same time, existing obstacles to a secure retirement have not gone away.
The COVID-19 Crisis Makes The Retirement Savings Crisis Worse
Under the CARES Act, individuals may take as much as $100,000 from their retirement accounts without penalty to deal with coronavirus-related hardships. One of the largest managers of retirement savings accounts, Fidelity Investments, reported that more than 165,000 individuals withdrew funds, with 3,200 withdrawing the full $100,000, from their plans in April 2020, using hardship withdrawal provisions. In addition to removing the 10% early withdrawal penalty, the new law allows individuals to pay the tax due over time. It also includes additional flexibility for 401(k) loans, changes to required minimum withdrawal rules, and other provisions to ease the current burden.
For families faced with being unable to meet basic living expenses, these new rules can be a real lifeline. Unfortunately, while they may enable people to pay their mortgage today, they place a new mortgage on their retirement futures.
To offset the financial damage that the COVID-19 crisis has caused to retirement savings, a more-holistic approach must be adopted that makes it easier for workers to catch up — and eventually even get ahead — once the crisis has passed.
Transforming retirement savings requires three key components: increasing access to savings, diversifying investment strategies, and delivering better income outcomes.
Increasing Access to Savings
The COVID-19 pandemic has shown how important savings, including retirement savings, can be for surviving a short-term financial shock. Unfortunately, as businesses weather the current economic storm, continuing to contribute to or even maintaining a retirement plan for employees may not be the top priority. Businesses that offered retirement plans but do not survive may leave even more workers without easy access to a way to save for retirement.
As we entered this crisis, more than 55 million Americans in the private sector workforce already did not have access to an employer-sponsored retirement savings plan. It is too early to assess the damage to retirement plans because of the COVID-19 pandemic. However, as businesses recover, they will have two more options to make it easier to get back on track. The recently adopted federal SECURE Act may encourage more businesses to join multiple employer 401(k) plan (MEP) arrangements instead of sponsoring their own plans. In addition, states have been hard at work in recent years to close the gap, creating simple retirement savings options that are easy for employers — especially small ones — to implement and that are also convenient and portable for workers. Lawmakers must make it as easy as possible for as many workers as possible to take advantage of these options and significantly expand coverage.
Diversifying Investment Strategies
The current stock market volatility has significantly reduced the value of many retirement portfolios. The sudden market downturn underscores the need to look at retirement savings as a challenge to be met over the span of decades, not days. Intelligent investing for retirement should prioritize long-term outcomes over short-term needs. While inequality of retirement outcomes may start with lack of access to savings, it is magnified if the savings of average workers are not able to generate the same investment returns over the long term that are otherwise available to large institutions and high-net-worth individuals.
Middle- and low-income savers do not have access to the same types of investment opportunities, including growing private markets, that are currently available to large corporate and public defined benefit (DB) plans and other institutional investors. Defined contribution (DC) plan managers should have access to the full range of investment vehicles, including less-liquid options like real estate and private equity, as well as strategies that can produce the best long-term investment returns and more-balanced portfolios. Analysis by Georgetown’s Center for Retirement Initiatives concluded that a more-diversified target date fund, for example, can improve retirement income outcomes, including when markets are stressed.
Delivering Better Income Outcomes
When pension-style defined benefit plans ruled the roost, workers did not have to give much thought to their own retirement beyond where they wanted to live and what they wanted to do with their golden years. With today’s DC plans, all the responsibility has shifted to the individual to make a constantly evolving series of choices — from how much and where to invest to how to manage those savings in retirement and make them last a lifetime.
While the responsibilities for individuals have increased, the infrastructure of the retirement savings plans has not changed all that much. As more workers rely solely on DC plans to fund their retirements, they also have come to expect these plans not just to be about accumulating savings, but also to help to generate an income in retirement. Plan sponsors increasingly recognize that this dependence on DC plans requires such plans to offer a more-robust suite of planning tools, increased financial education, improved account portability, and a wider range of options for generating lifetime income.
The American people have proved remarkably resilient in the face of the current crisis. Individuals have chosen to invest in the future by following the advice of experts and staying home. Many have taken extraordinary steps to help each other meet the health challenge despite the steep financial costs. For many, retirement accounts represent their only savings, so emergencies leave them no choice but to borrow against their 401(k) balances or make early withdrawals.
Policymakers owe a significant debt to the workers who have sacrificed their own economic well-being in the present and should pay it back, by providing more and better options to help them catch up on retirement savings when the storm passes. While there is no question that everyone must do what has to be done to get through the crisis, it is not too soon to begin to focus on what the recovery will look like and what government and the private sector can do to transform the landscape and better secure the retirement future for all Americans.
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