Provisions in the recently enacted stimulus measures in the U.S. as well as in Australia and Malaysia will make it much easier for plan participants to tap retirement savings during the coronavirus crisis.
In Australia, participants will be allowed to withdraw up to A$20,000 ($12,000) by early next year from their superannuation accounts. Malaysians will be able to withdraw monthly from their Employees Provident Fund savings for the next year.
In the U.S., the new Coronavirus Aid, Relief, and Economic Security Act waives early withdrawal penalties for hardship distributions up to $100,000 and allows for larger loans from an individual's retirement account. It's up to each U.S. plan sponsor to decide whether they want to implement these emergency measures.
As a result of these changes here and abroad, sponsors more than ever have a big responsibility to educate participants about the ramifications of withdrawals during a battered market: Namely, it will be it virtually impossible for them to recover the investment losses and asset drawdowns in their accounts. In sum, while these short-term fixes can help address immediate financial challenges, the actions present a huge threat to an employee's long-term retirement security. At the risk of coming off as paternalistic, sponsors must stress that such steps are a last resort. They should encourage participants to first cut back on current retirement plan contributions to free up cash. And they should be open to out-of-the-box solutions. Could employees perhaps "cash in" accrued vacation days, for example? Sponsors in the U.S. have used the latter to help repay student loans as part of their financial wellness efforts.
Now is the time for innovative thinking in regard to helping participants navigate the current crisis without wrecking their long-term retirement security.