Two Sides of the Same COVID Coin: Dipping into Retirement Savings and Early Retirement

While plan sponsors don’t have all the answers for every single employee, knowledge is power, and providing easily accessible informational resources can help their employees navigate this difficult time and make the right decision for them.

When it comes to retirement and retirement savings, plan sponsors may find themselves facing two very different, but clearly interconnected COVID concerns. Some employees may be looking to take advantage of the IRS’ expanded hardship withdrawal criteria to use retirement savings for COVID-related expenses, while others may be considering early retirement to avoid the possibility of infection.

As states begin reopening, many are being called back to work, which has caused worker uneasiness across the board, but especially in older workers. The CDC notes that older adults are at a higher risk, with 8 out of 10 reported COVID-related deaths affecting adults 65 or older. It’s therefore no wonder that those close to retirement age are pausing to reflect on whether or not it may be time to retire rather than take on the potential health risks of returning to work.[1] For those laid off from their job, the job market may be almost as significant a threat to the future plans of workers approaching retirement age as the virus itself, as unemployment numbers remain staggeringly high even as businesses begin to tentatively open their doors.

Having clear, concise information on what workplace safety measures will look like can help employees make a decision that they’re comfortable with, but especially for educational, retail, and food service employees, or others who can’t work from home, the health risks may outweigh the financial benefits of returning to work. Plan sponsors can provide educational resources for those near retirement age, so they can understand the financial implications of early retirement based on how far they are from retiring and therefore make a more informed decision.

On the other side of the spectrum are people who are dipping into retirement savings to cover unexpected expenses that arose from the impact of the coronavirus. We’ve talked about this before in our series about the CARES Act, and the data available on who is withdrawing and why can help plan sponsors address this with their employees.[2] According to a study by Commonwealth and the DCIIA’s (Defined Contribution Institutional Investment Association) Retirement Research Center, only 5% of the low-to-moderate income plan participants they surveyed have tapped into 401(k) savings and 7% plan to do so in the near future, while another survey by SimplyWise found that 24% of survey participants plan to use 401(k) funds including 41% whose layoffs were prompted by coronavirus.[3][4]

Commonwealth also found that those with little or no liquid savings were more likely to use retirement funds while those who were older and/or whose plans included employer matching were less likely to do so. Overall, employees were more likely to reduce expenses or retirement contributions, while a smaller percentage of others found it necessary to miss bill payments, borrow money, or sold some of their worldly goods. Additionally, many are using credit cards as emergency funds with employees of color were more likely to do so than their white counterparts (20% versus 12% of white employees). Knowing this, plan sponsors can highlight informational resources like financial advising services and clarify regulations regarding the CARES Act to help employees figure out what approach is best for them, both in the moment and for their long-term retirement savings goals.

It’s not an easy decision to make, and it can often feel like a no-win situation balancing immediate needs with retirement savings. Indeed, while there are many reasons why employees may be eyeing their retirement savings, equally as important are the reasons for abstaining from withdrawing retirement funds (if possible), including penalties for those who have misunderstood the eligibility requirements and self-certified that they qualify when that may not be the case. While plan sponsors don’t have all the answers for every single employee, knowledge is power, and providing easily accessible informational resources can help their employees navigate this difficult time and make the right decision for them.





These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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