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How Plan Sponsors and Participants Reacted to CARES Act CRDs


In an update to its annual “How America Saves” study, Vanguard offers a detailed look at how plans and participants responded to the added 401(k) distribution options provided by the CARES Act. 

Vanguard released its 2020 edition of “How America Saves” earlier this year, but it was based on 2019 data and given how dramatically COVID-19 had affected the first half of 2020, the authors felt that it was imperative to offer additional perspectives. 

Following enactment of the CARES Act in March, Vanguard reached out to their plan sponsor clients to determine which options they wanted to implement in their plan. The firm notes that, as of May 31, 65% of plan sponsors had responded, with 99% of those indicating that they are permitting their participants to access retirement funds if needed. 

In addition, of the plans allowing access, 83% are extending this option to both active and former employees who still maintain a balance in the plan. 

Remarkably, despite all the economic turmoil, Vanguard found that of the participants offered the Coronavirus-related distributions (CRDs) option, only 1.9% withdrew assets from their retirement plan through the CARES Act provision, based on CRDs through May 31, 2020. 

Of those participants, Vanguard notes that 91% took one distribution, while 9% initiated multiple distributions over the two months. The average participant distribution was $20,690, while the median distribution amount was $10,413. 

CRD Size

And even though participants can withdraw up to $100,000 under the CARES Act until Dec. 31, 2020, nearly 3 in 10 distributions were for less than $5,000 and two-thirds of all withdrawals were for less than $20,000 as of May 31. The firm notes that withdrawals of more than $30,000 were less common and only 4% of participants who took a distribution initiated a maximum CRD of $100,000. 

When examining the distributions based on the percentage of a participant’s balance as of March 2020, Vanguard found that the average distribution represented 61% of a participant’s total balance. What’s more, 3 in 10 participants who initiated a CRD withdrew 90% of more of their account balance, whereas 4 in 10 participants withdrew less than half of their balance. 

However, participants who accessed a higher proportion of their account balance did not typically take larger distributions, the update observes. When the researchers segmented participants who initiated a distribution by the percentage of their account balance, they found that the media distribution was between $10,000 and $12,000 for all segments where participants accessed at least 10% of their plan assets.

As one might expect, participants accessing a higher percentage of their account balance tended to have lower balances, were younger and had less tenure and lower income, compared with those accessing a smaller percentage of their account balance. 

Adoption Rates and Demographics

The Vanguard researchers further found that participants between the ages of 45 and 54 were the most likely to initiate a CRD, while younger and older participants were less likely to do so. 

Participants with annual income between $50,000 and $75,000 were more likely to request a CRD, and participants with lower and higher incomes were less likely, according to the findings. And participants with an account balance between $10,000 and $50,000 were more likely to request a CRD when compared with participants with larger account balances. 

When assessing adoption rates by industry, participants in the transportation, utilities and communications sector initiated a withdrawal at the highest rate at 4.3% of participants. This sector was followed by the agricultural, mining and construction, and manufacturing sectors, where 2.8% of participants in each sector initiated a withdrawal. Not surprisingly, participants in the business, professional and nonprofit sectors were the least likely to access their plan assets. 

Deferral Rates

When examining the elected deferral percentages from the end of March through the end of May, Vanguard found that nearly 80% of participants initiating a CRD either maintained or increased their deferral rate. Of the 10% of participants who increased their deferral rates, half of these increases were due to annual automatic increases, according to the data. 

Additionally, 8% of participants decreased their deferral amount during this period, while 3% opted not to defer. Ten percent of participants were not contributing as of the end of March and maintained this election through the two months, Vanguard notes. 

With the median distribution amount being $10,413, the median distribution age of 43 and median income of about $62,000, and assuming a real investment return of 4%, Vanguard projects that the median participant distribution would grow to approximately $25,000 over the next 24 years. 

Based on the median amounts or the typical participant, the update suggests that many could cover this potential shortfall by increasing their deferral rate by one percentage point, but this, of course, depends on various factors, including distribution amount, time left until retirement and earnings. 

The update is based on 1,142 qualified plans that elected to allow participants to initiate a CRD, representing 4.2 million participants for which Vanguard directly provides recordkeeping services.