Workers tap 401(k) plans as last resort during virus
About a month into the pandemic, Tyler Mathiesen lost his position at a tech company, his first full-time 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 Principal. 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 percent 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. “For example, maybe an active employee’s spouse had a job loss, so a withdrawal would be helpful to make up for the lost household income.”
Usually, pulling out money from a tax-deferred account before age 59½ would set off a 10 percent penalty on top of any income taxes. But under the temporary rules that are part of the coronavirus relief bill, 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 your 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 coronavirus-related withdrawals through Nov. 21, or about 5.6 percent of eligible workplace plan participants. About 2.2 percent of participants a year took traditional hardship withdrawals in recent years, Fidelity said.
The average total withdrawal this year was about $20,000, often spread over two or three transactions. That is more than three times as much as the typical hardship withdrawal.