Payback of withdrawals now sponsors’ focus

Plan sponsors are working hard to reach out to participants who dipped into their retirement savings during the pandemic, record keepers and other industry observers say.

"It's a huge focus, especially within industries that were greatly impacted, such as travel and entertainment," said Jeanne Thompson, a senior vice president at Fidelity Investments Inc. in Boston.

Plan sponsor outreach to participants is picking up notably in industries where people are returning to work but is more muted in industries where people are still furloughed or working reduced hours, Ms. Thompson said.

"They're trying to be sensitive to the financial position that people may be in," she said of plan sponsors trying to connect with participants who either pulled money from their retirement accounts or borrowed against them to make ends meet during the pandemic.

The retirement plan provisions of the CARES Act, which former President Donald Trump signed into law in March 2020, made it much easier for plan participants to tap their retirement savings for COVID-19-related financial emergencies. Participants whose employers adopted the voluntary measures were able to take hardship distributions of up to $100,000 from their retirement accounts without the 10% early withdrawal penalty if they were under the age of 59½. They could also borrow up to $100,000 from their accounts, or twice as much as they could before.

As the nation emerges from the pandemic, plan sponsors are taking stock of who took advantage of the distributions and loans available under the CARES Act and encouraging them to gradually replenish their balances. Sponsors fear that if participants took the maximum amount — or depleted their savings, as some of them did — it could have a devastating impact on their ability to retire on time, many observers say.

To the relief of many plan sponsors, the uptake on the loans and withdrawals was much more restrained than anticipated. Almost half of plan sponsors (49.4%) reported that the percentage of participants who took coronavirus-related distributions ranged from less than 1% to 5%, according to a survey of 139 plan sponsors conducted by the Plan Sponsor Council of America in November. More than 1 in 10 (14.7%) said that none of their participants withdrew funds.

Even fewer participants took advantage of the loans available. The majority of plan sponsors (64.3%) reported that the percentage of participants taking coronavirus-related loans ranged from less than 1% to 5%. More than 1 in 5 (21.4%) said there were no takers on the loans.

Still, plan sponsors are concerned. "Maybe the uptake wasn't as high as we might have thought, but there was still a lot of money that left the system," said Jamie McAllister, senior vice president on Callan LLC's defined contribution team in Chicago.

At Fidelity, for example, 1.6 million participants — or 6.3% of the company's participant base — withdrew a total of $32 billion, with the typical distribution averaging $9,400.

That's considerable given that the average account balance is about $100,000, Fidelity's Ms. Thompson said. "If someone takes out roughly $9,000 or $10,000, they're taking out 10%," she said.

At Vanguard Group Inc., about 234,000 participants, or 5.7%, took a coronavirus-related distribution in 2020, with participant distributions averaging $24,600. At Principal Financial Group, roughly 6% of participants in plans where coronavirus-related distributions were available took distributions averaging $17,000. Neither Vanguard nor Principal was willing to disclose how much money left their plans in coronavirus-related distributions.

Concerned that the distributions and loans may prevent many participants from retiring on time, plan sponsors are initiating targeted communication campaigns to encourage participants to restore their balances, according to industry observers.

"If that money doesn't make it back into the plan or back into some kind of retirement savings, then that individual is probably going to have less to retire on and may not have enough," said Amy Reynolds, partner at Mercer LLC in Richmond, Va.

The targeted email communication campaigns typically cover the tax implications of having taken a CARES Act distribution and explain the options for paying it back. Participants have the option of "recontributing" their distributions back to their retirement accounts within three years, a move that would reduce their tax bill on the money they took out.

Instead of repaying the distributions, some plan sponsors are suggesting that participants increase their contribution rate by 1%, "a relatively simple remedy" that would close the retirement savings gap "the sooner participants take it," said Dave Stinnett, Vanguard's Malvern, Pa.-based head of strategic retirement consulting.

"If they're contributing 4% of their pay, they would just need to bump that up to 5% this year," Mr. Stinnett said, adding that the modest measure would bridge the gap in participants' retirement readiness over the length of their working lives.

The communications also sometimes include messages about the implications of the withdrawals to participants' retirement income. Fidelity, for example, is starting to illustrate how much participants will have in monthly retirement income if they don't pay back the distributions.

If that amount is not enough, the communication will show how much longer the participant may have to work, Fidelity's Ms. Thompson said.

Principal's email campaign, meanwhile, is focused more on making participants aware of where they can go for guidance on their withdrawals, said Joleen Workman, Principal's Des Moines, Iowa-based vice president of customer care.

As participants think about ways in which to replenish their balances, they can go to Principal's participant contact center where they can speak with a customer representative or use Principal's website and mobile apps, she said.

Principal also provides a loan tracker that allows participants who took a COVID-19 loan to interact with their deferral contribution and retirement wellness score. Once the loan is distributed, the loan amount is "front and center" on the website and mobile app, Ms. Workman said, adding that the firm has "super-simple easy tools" for participants to use.

Vanguard, too, says it provides similar tools. Participants, for example, can use their mobile phones to track and pay back their coronavirus-related withdrawals and loans, Mr. Stinnett said.

While the campaigns have only recently started, some record keepers are already seeing a trickle of money flowing back into plans.

"We did start to see some participants paying it back, but I think we're only scratching the surface because people need to get their financial footing back," Fidelity's Ms. Thompson said.