Although millions of Americans have been severely impacted by the coronavirus pandemic, the vast majority of retirement savers have refrained from dipping into their 401(k)s to cover their expenses.
During the first half of 2020, 2.8% of retirement savers made withdrawals from their defined contribution retirement plans, the most popular of which are 401(k)s and 403(b)s, according to recent data from the Investment Company Institute. This does not include individual retirement accounts and the percentage of savers making withdrawals is separate from those taking out 401(k) loans. ICI's data is based on information straight from plan providers and covers more than 30 million DC plan accounts, which is generally a type of tax-advantaged retirement account where typically both savers and employers contribute.
The level of withdrawals during the first half of the year is up only slightly from the 2.5% of retirement savers who took money out of their 401(k)s during the same period last year. About 2.2% of savers took a withdrawal during the first half of 2018, according to ICI.
Of the money withdrawn this year, about 1.1% of savers took the money as a hardship withdrawal, ICI reports. Those seeking this type of withdrawal must demonstrate financial hardship, such as the potential for eviction from your home or overwhelming medical debt, and generally many plan providers will still impose a 10% penalty on the funds taken out.
It's worth noting that the number of accounts taking withdrawals reported by ICI is far less than the roughly 14% of survey respondents with retirement savings who said in May that they had taken money from accounts such as 401(k)s and individual retirement accounts. That survey data was based on a much smaller pool of retirement savers and included all of types of retirement accounts, whereas ICI's data focused only on defined contribution plans such as 401(k)s and had a much larger data set.
Separate from withdrawals, ICI found that 2.9% of participants took the newly created coronavirus-related distribution during the first half of the year. In response to the sudden economic downturn, Congress passed provisions in the CARES Act that allow Americans to take a withdrawal of up to $100,000 from their retirement savings, including 401(k)s or individual retirement accounts, without the typical 10% early withdrawal penalty.
Referred to as "coronavirus-related distributions," they are available only in 2020 and can be repaid within three years to avoid any income taxes on the funds taken. When plan providers identify these new CRD options (some do not), they categorize them separately from straight withdrawals, says Sarah Holden, ICI senior director of retirement and investor research.
When it comes to 401(k) loans, 15.6% of plan providers reported they had outstanding loans at the end of June, according to ICI, which tracks loan data quarterly. That was down slightly from the 16.3% of plan providers who had outstanding loans at the end of March and the 16.1% reported at the end of 2019.
The introduction of the pentalty free conronavirus-related distributions may be contributing to the lower 401(k) loan activity, ICI reports. "Because policymakers have made these [CRD] withdrawals repayable, they've kind of made them a bit more like a loan," Holden says. Instead of taking out a loan, some savers may be opting for the new CRD option instead.
"We see a slight increase in withdrawal activity following the onset of economic volatility and hardship, but the increase is much smaller than you might expect, given the severity of the Covid-19 economic downturn," says Holden.
The low loan activity may also be due to Americans not hitting the point yet where they need to tap their retirement accounts. "We do see that more people have [401(k)] loans in the wake of financially stressful times, but not immediately," Holden says. Historically, people usually drain other accounts, such as emergency savings, before dipping into their retirement funds, she says.
In fact, many Americans have not even had to halt their savings levels amid the pandemic. Only 2% of plan participants stopped contributing to their plans in the first half of 2020, ICI's data shows. That's higher than the 1.3% of savers who stopped putting money away during the first half of 2019, but less than the 4.6% who ceased to contribute in the first half of 2009, during the Great Recession.
"These data reflect the long-term mindset of retirement savers," Holden says. "These assets represent a pot of money that savers have earmarked for retirement and they have consistently demonstrated that they generally stay the course to reach that financial goal, even during challenging economic situations."