Could CARES Cripple Retirement Readiness?

The CARES Act has greatly expanded American workers' pre-retirement access to their retirement accounts—so, how might it affect their retirement?

There would seem to be plenty of reason for concern—the definition of person(s) affected by, and thus qualified[i] for, this expanded access through loans and distributions is sweeping. Moreover, the assertion of qualification has essentially been left to the impacted individual(s) themselves (if their plan has adopted the provisions). The early unemployment numbers reflect a lot of economic pain is already upon us, and financial “vultures” are wasting no time, encouraging workers to take advantage of this opportunity to move money from the confines of their workplace plan to vehicles outside of those protections (that’s not exactly how they explain it, however).  

The newly expanded limits under the CARES Act, while generous, are not without precedent. Indeed, while there are some new aspects, the liberalization of access during times of crisis has become almost routine, harkening back to relief for victims of Hurricane Katrina back in 2005. That said, despite recessions, massive swings in the market, tech “bubbles,” wars, natural disasters, and “the” financial crisis, the volumes of loans and withdrawals have—at least on a national scale—been remarkably constant.

The reality is that, in aggregate, our nation’s private retirement system has weathered many storms,[ii] and that bodes well for the long-term restorative ability of the system, assuming modest regulatory relief. 

That doesn’t mean that isn’t cause for concern. In financial straits in the past there surely have been individuals whose circumstances required that they draw down money from their retirement savings—and there will surely be more of this now. Some call it robbing Peter to pay Paul, but the reality is that for many the 401(k) is their only savings (and thank goodness they have that). We might well wish that more had established the emergency savings accounts that could have provided a financial buffer—but that reality today is what it is. We do hope that, as this crisis passes, a focus on the benefits of an emergency savings buffer will receive fresh and enthusiastic support.

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We still hope that the federal financial support being extended to businesses will allow many, perhaps most, to retain the employment of their workforce—and that in short order the retirement plan relief that has been requested for employers will become a reality so that they will be able to keep in place those programs that are such an essential element of our nation’s retirement security. We know that, given an opportunity to save in a workplace retirement plan, the vast majority of even modest income workers do—but likely won’t if they don’t have that opportunity.

For now we can hope that the availability of this expanded relief will provide a temporary, if necessary, financial respite—and that time will provide the means and opportunity to restore and replenish the funds withdrawn. 

Or perhaps better yet, that simply knowing that the option is available will provide peace of mind such that other financial sources will suffice.

[i]A qualifying individual is defined as someone: (1) who is diagnosed with the virus (via test approved by CDC); (2) whose spouse or dependent is diagnosed with the virus: or (3) who experiences adverse financial consequences as a result of quarantine, furlough, layoff, reduced hours, inability to work due to childcare, closing of business, or other factors as determined by the Secretary of the Treasury. The plan may rely on participant certification that those condition(s) are met.

[ii]Arguably the real trials have come not from these periods of expanding access, but from limiting input, such as in the Tax Reform Act of 1986.

this post originally appeared here.