Virus has workers tapping 401(k)’s

About a month into the pandemic, Tyler Mathiesen lost his position at a tech company, his first fulltime job out of college. For several months, everything was fine: Payments on his $ 75,000 in student loans were paused, and the extra $600 weekly federal unemployment benefit helped pay the rest. He even managed to save some money.

But as the summer ended, the added benefit expired and his regular state unemployment benefits were close to running out. He needed a plan, and fast.

His solution: draining all $8,200 he had in his 401(k).

“I needed money to pay for rent and food,” said Mathiesen, 24, who lives with his girlfriend in St. Paul, Minn. With no clear indication that further relief would be on its way, he said, “I figured this was my only realistic way to get money that I needed.”

Since the pandemic began rippling through the economy in March, more than 2.1 million Americans have pulled money from retirement plans at the five largest 401(k) plan administrators: Fidelity, Empower Retirement, Vanguard, Alight Solutions and Prin

cipal. These workers, especially those in hard- hit industries like transportation, manufacturing and health care, have been helped by more flexible withdrawal rules created by the coronavirus relief bill.

Even with millions unemployed and the economy’s recovery shaky at best, that is only about 5% of the eligible 401( k) and 403( b) clients across all of those companies.

But that is still higher than in a more typical year, when many participants can still generally withdraw money for hardships, albeit under a stricter set of rules.

The various federal relief programs put into place — including stimulus payments, more generous unemployment benefits and the suspension of federal student loan payments — have helped curb the damage, retirement experts said. But some of those programs have already run out or could soon.

“As these start to expire, there may be an uptick in withdrawals for households that have been financially impacted,” said David Fairburn, associate partner at Aon, a professional services firm that provides retirement consulting.

Usually, pulling out money from a tax-deferred account before age 59½ would set off a 10% penalty on top of any income taxes. But under the temporary rules that are part of the Coronavirus Aid, Relief, and Economic Security Act, people with pandemic-related financial troubles can withdraw up to $ 100,000 from any combination of their tax-deferred plans, including 401( k), 403( b), 457( b) and traditional individual retirement accounts — without penalty. The rules apply to plans only if the employer opts in, and they expire Dec. 30.

Some plans already permitted hardship withdrawals under certain conditions, and the rules for those were loosened a bit in 2019. But the coronavirus relief bill’s rules are even more lenient: Virus-related hardship withdrawals are still treated as taxable income, but the liability is automatically split over three years unless the account holder chooses otherwise.

And the tax can be avoided if the money is put back into a tax-deferred account within three years.

At Fidelity, the largest provider of retirement plans, roughly 1.4 million participants have taken corona virus- related withdrawal s through Nov. 21, or about 5.6% of eligible workplace plan participants. About 2.2% of participants a year took traditional hardship withdrawals in recent years, Fidelity said.

“People are taking just what they need, and they are trying to minimize the impact to their overall savings,” said Jeanne Thompson, senior vice president for workplace consulting at Fidelity.

Other large workplace 401(k) providers witnessed similar behavior. Vanguard — with 5 million total plan participants — said 5.3% of those with a corona virus related withdrawal option have taken one through Nov.

30. Roughly 3.2% of eligible participants, on average, took a traditional hardship withdrawal over the past five years.

At Principal, about 5.7% of the 2.6 million participants with a coronavirus-related distribution option available have taken one through Nov.

30.

(Individual retirement accounts may also be tapped, but experts said detailed withdrawal data will not be available until after those people file tax returns.)

Only about half of households have balances inside 401( k) plans or individual retirement accounts, according to the Center for Retirement Research at Boston College. And lower-paid workers without retirement plans have suffered a disproportionate share of the pandemic-related job losses, experts said.

But the scope of the damage wrought by the pandemic means that even the traditional emergency savings advice — putting aside roughly three to six months of basic living expenses — has not necessarily been enough to provide a cushion. Someone who lost a job in March could have easily burned through that amount of savings.