COVID-19 has disrupted life as we knew it, upending our daily lives, threatening the health of many, and exacerbating the financial stress already facing many families. The short-term impacts have been substantial and have received considerable attention, but we should not lose sight of the potential for long-term financial consequences, especially on retirement security.

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Short-term relief, long-term consequences

As millions of Americans found themselves out of work and many small businesses were forced to close at least temporarily, policy makers responded with aid to individuals and companies: unemployment benefits, the Paycheck Protection Program, and more. The bipartisan CARES Act relaxed regulatory restrictions and tax burdens so someone could withdraw up to $100,000 from retirement savings to meet more-immediate obligations if they or their spouse were diagnosed with coronavirus, or they have been affected financially by the pandemic.

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The early data suggest that relatively few have taken advantage of the ability to stop contributing to or make hardship withdrawals from their 401(k) plans; most plans report that less than 5% of their participants took that step. This could be a result of government assistance and efforts by these businesses to provide additional education to their employees and discourage them from taking Coronavirus-Related Distributions (CRDs) and more loans. Nevertheless, 3,200 individuals had already withdrawn the full $100,000 hardship limit by April 2020, according to one report, which alone represents $320 million in savings that evaporated.

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According to Vanguard’s survey How America Saves 2020, fewer than 2% of participants took CRD withdrawals, with an approximate median of $10,000. This may seem like a small price to pay for financial security now, but a worker who withdraws $10,000 at age 35 could miss out on approximately $43,000 in retirement savings by age 65.

Employers shedding jobs, not retirement plans So far, early fears that some employers might end retirement plans or stop their contributions to employee plans have not been realized. According to surveys by Mercer and the Plan Sponsor Council of America (PSCA), few have suspended the employer match and almost none have terminated plans. Ironically, larger businesses — with more than 500 employees — were somewhat more likely to have suspended match contributions than small businesses.

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