The CARES Act presented defined contribution participants and retirement executives with a challenge: Would the rules for loans and distributions — more liberal than traditional policies — interrupt long-term savings strategies as participants used the law to meet emergency needs caused by the coronavirus?
"Clearly, that could be one of the unintended consequences," said Joshua Dietch, vice president of retirement thought leadership for T. Rowe Price Group Inc., Baltimore, about the prospect of participants losing long-term savings momentum by taking CARES Act loans and/or distributions.
"That was one of the emotions when the act came out," added David Stinnett, the Malvern, Pa.-based principal and head of the Vanguard Strategic Retirement Consulting Group. "The next impulse in the industry was, 'I hope they don't overuse this.'"
For the most part, they haven't.
More than five months after the law's passage, surveys and record-keeping data show that, in general, participants' use of the law's loan and distributions provisions so far has ranged from meager to modest.
Record keepers suggest that design changes have softened the blow of coronavirus-induced leakage and could help participants regain the momentum of long-term savings.
Before participants could take advantage of the CARES Act provisions, their plan sponsor had to opt in, with early research offering mixed results. Among clients of Vanguard Group Inc., for example, 65% as of May 31 said they wanted to offer CARES Act features. A survey of 840 plan sponsors conducted in mid-May to early June by the Secure Retirement Institute found that 38% didn't offer loans or distributions authorized by the law and 19% said were unsure if they would.
The Coronavirus Aid, Relief, and Economic Security Act was signed into law by President Donald Trump on March 27. Soon afterward, Jack VanDerhei, research director of the Employee Benefits Research Institute, Washington, began working on economic models to assess how the CARES Act might affect the "future retirement security" of workers.
"I don't think it's going to be drastic for the majority" of DC plan participants, Mr. VanDerhei said, referring to the CARES Act's impact on long-term savings. "Some people will have serious consequences."
He prepared scenarios and issued them in a July 30 report."We see potentially significant reductions in retirement benefits" when employees take the maximum — $100,000 — distribution under the CARES Act and don't pay it back, the report said. "This is especially true for older age cohorts."
His models estimated at the median that overall participants taking a $100,000 distribution and not repaying that amount would suffer a 20% decline in retirement balances at age 65, the report said. If they took out the full amount but paid it back in three years, the balances would fall by 2.3%.
However, in a preliminary analysis of his models, applied to an actual survey of plan sponsors, he concluded that "reductions were very small," the report said. Even if employees didn't pay back the distribution, the estimated cut in account balances was less than 0.5%, said the report, attributing the findings to "low estimated implementation and utilization" of CARES Act provisions.
Mr. VanDerhei said in an interview his early modeling had to deal with "big uncertainties" — how many sponsors would offer one or more of the act's provisions, how many record keepers would participate, and how effective would be the communication to participants about balancing short-term needs against long-term savings.
Another hard-to-measure factor is how many people will lose their jobs. "Unemployment is the crucial issue," he said.
Remarking that the CARES Act's impact on retirement savings has "50 different moving parts," he added that "there's more uncertainty here than with anything I have done before."