Considering the recent market volatility and related economic fallout, new research by EBRI finds that the impact still appears to be recoverable.  

In an April 21 Issue Brief, “Impact of the COVID-19 Pandemic on Retirement Income Adequacy: Evidence from EBRI’s Retirement Security Projection Model,” EBRI examines how the 2020 market crisis along with potential behavioral responses and decreases in DC plan eligibility could affect overall retirement deficits.  

While emphasizing that the analysis is not meant to minimize the potential impact on specific individuals, the EBRI Issue Brief notes that the combined impact of all “intermediate assumptions”—including the investment losses already experienced in the first quarter of 2020—“certainly appears to be manageable.”

EBRI’s brief shows that the $3.68 trillion aggregate deficit for all U.S. households ages 35–64 as of Jan. 1, 2020, only increased 4.5% or by just over $166 billion. Even the combination of “pessimistic assumptions” show that the aggregate retirement deficits increased by 11.2% or nearly $413 billion. In contrast, if all the “optimistic assumptions” are used—including that investment losses for 2020 are only half of what was experienced in the first quarter—the aggregate retirement deficit would increase by only 2.6%, or slightly more than $96 billion. 

Overall, EBRI finds that market volatility may be the largest factor in increasing retirement savings shortfalls and decreasing savings surpluses, especially in a worst-case scenario. Moreover, for the youngest workers, permanent termination of DC plans under $10 million in assets could have a large impact.

Suspension of matches by sponsors, contribution suspensions by workers, increases in withdrawals and decreased eligibility do not have as much impact when spread over all U.S. households, but they may have a “significant influence” on those impacted by these factors, according to EBRI. 

Regarding these various scenarios, the analysis further breaks down the potential impact based on the three sets of assumptions (optimistic, intermediate and pessimistic). For purposes of providing a middle-of-the-road snapshot, EBRI’s “intermediate assumptions” are below.  

• Impact of small plan terminations: This scenario is based on analysis of a survey by the American Retirement Association, NAPA’s parent organization. Based on an assumption that 40% of plans with assets of less than $10 million will terminate, EBRI finds that this scenario would increase the aggregate retirement deficits by $31.24 billion. 
• Plan sponsors suspend employer matches to 401(k) plans: Based on an assumption that 20% of 401(k) plan sponsors will suspend their matches for a single year, the analysis finds that aggregate retirement deficits would increase by slightly more than $2 billion for this scenario. 
• Plan sponsors suspend employer matches, combined with participants reducing contributions: This set is based on analysis performed in the last financial crisis and is assumed to translate into a 20% reduction in employee contributions for a one-year period only. Here, EBRI finds that aggregate retirement deficits would increase by $2.31 billion—or an increase of $0.22 billion over the $2.09 billion increase from the impact of the suspension of employer matches alone.
• One-time increase in withdrawals: This set is based on an analysis from an Investment Company Institute time series. Assuming there will be a one-time increase in the individual withdrawal probabilities of 13.2%, the analysis shows that this scenario would increase the aggregate retirement deficits by slightly more than a $1 billion. 
• Decrease in DC plan eligibility as a result of unemployment: While the official unemployment rate for April is not currently available, EBRI notes that, given the increase in unemployment filings, it appears there is approximately a 10-percentage point increase in the unemployment rate compared with the beginning of 2020. Based on that scenario and a similar decrease in eligibility rates for DC plans for the next two years, the analysis estimates that aggregate retirement deficits would increase by $4.23 billion.

“While employers and policymakers cannot control market fluctuations, they can be aware of the impact of plan sponsor and participant behavior on retirement income adequacy and develop approaches that can help mitigate damaging behavior today and position plans for robust utilization when the crisis ends,” notes EBRI. 

EBRI notes that a future Issue Briefwill analyze the impact of the CARES Act on retirement income adequacy, factoring in the potential ability of affected workers to take much bigger loans and withdrawals than they could even during the 2007–2009 financial crisis.

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