Almost a quarter of U.S. workers (22%) have borrowed money from their retirement accounts.
That’s what American Consumer Credit Counseling (ACCC) found in its new financial health index, which measured financial confidence among workers. The survey also reported the percentage of employees who are increasingly doubtful of the U.S. economy rose as well, from 16% in March to 23% in June. Since March, the ACCC has assisted more than 1,400 clients with financial issues related to COVID-19.
The U.S. opened up retirement plans for participant withdrawals under the Coronavirus Aid, Relief and Economic Security (CARES) Act, to act as a temporary solution for those without emergency savings. Those who take a coronavirus-related distribution (CRD), which can be up to $100,000, are not subject to the 10% excise tax that otherwise applies to distributions made before an individual reaches 59.5, and can pay back the loan within three years. The option proved to be a useful solution among some workers, and in June, the IRS expanded the categories of individuals eligible to borrow.
Many believe the provisions under the CARES Act offered a soluble option for those affected by the coronavirus and in need of financial assistance. Neil Lloyd, a partner and head of US Defined Contribution & Financial Wellness Research at Mercer, said he believed the CARES Act is a positive thing for some workers. “There was a shortage in people’s financial need that needed to be addressed. Retirement is something we still need to deal with, but it’s not today’s problem,” he said in an interview with PLANSPONSOR. Research has found that employees are more focused on financial planning related to current life events too, rather than retirement. In response, experts recommend shifting retirement planning communications to consider what participants have experienced in the coming months.
Yet others are worried about participants’ retirement readiness, noting that retirement savings should be used as a last resort for meeting emergency expenses. In an April opinion piece for PLANSPONSOR, Neal Ringquist, executive vice president and chief sales officer at Retirement Clearinghouse, argued that short-term needs shouldn’t take charge over long-term planning.
“Most plan participants still have the benefits of time and continuous paychecks—both of which disappear in retirement,” Ringquist writes. “That’s why retirement savings should be used as a last resort for meeting emergency expenses after all other alternatives, such as government assistance and borrowing, have been exhausted.”
As the pandemic continues throughout 2020 and even into 2021, more reports are expressing concerns over its effect on the retirement industry. A working paper issued by the Pension Research Council of the Wharton School at the University of Pennsylvania says the coronavirus pandemic has weakened the retirement system. The paper drew attention to a World Economic Forum estimate, which projects the retirement savings gap will grow by 5% each year and ultimately reach $400 trillion by 2050.
Even as participants borrow from their retirement accounts, the ACCC report noticed an increase in confidence concerning employment stability. In March, 27% of respondents said they believed their employment to be “very stable,” while in June, that rose to 34%. Additionally, there was a 6.7% increase in consumers being very confident about continued employment—however, there was also a 3% increase in consumers who are not confident at all.