With 401(k)s open for relief, will savers take advantage?
As Connecticut residents entered the weekend taking a fresh assessment of their income, available cash and financial obligations, many got an additional relief valve — retirement savings that they will be able to raid today, though at a potential cost to their future.
As part of the $2 trillion Coronavirus Aid, Relief, and Economic Security Act compromise that emerged Wednesday from the U.S. Senate, workers will be able to access cash from their 401(k) retirement plans without the accustomed 10 percent penalty at amounts of up to $100,000, with taxes still applicable.
For any households with earners later in their careers who have been socking away steadily for retirement, it could represent a major source of immediate liquidity, with the Investment Company Institute estimating at $5.7 trillion the savings in 401(k) plans of American workers and retirees, as of last summer. The Internal Revenue Service reported nearly $4.4 billion in taxable distributions from individual retirement accounts held by Connecticut residents in 2017, averaging more than $20,000 each.
The CARES Act provision does not help many Americans who need assistance the most during the COVID-19 pandemic — those with little in the way of extra assets to their name and who have not been able to generate sufficient superfluous income to save for retirement.
But it could give a short-term boost to some younger workers who have made saving for retirement a priority and who have accumulated significant amounts in their 401(k) accounts, whether on their own dime or in some cases with matching contributions from their employers.
Fidelity Investments told CNBC last year that in its own client base, workers below age 30 averaged only about $12,000 in their 401(k) accounts, with the figure climbing to over $40,000 for thirtysomethings, and topping $100,000 for those in their 40s.
Particularly for workers early in their careers, a 401(k) raid may seem more palatable than other options to meet necessary expenses like racking up creditcard debt or attempting to secure a bank loan, given the extra runway in their careers to replenish those accounts.
But the future costs are significant, with an online calculator offered by Wells Fargo suggesting a $10,000 withdrawal by a worker 30 years out from retirement would come at a cost of more than $30,000 in future earnings at historically normal stock prices and appreciation over time, if not replenished.
The CARES Act does not include any immediate levers that could help workers with “catchup” payments, whether with regard to their own 401(k) contributions, company matches, or other means.
Retirement account raids are not unusual in normal times. In its annual survey last year of more than 5,000 workers nationally, TransAmerica reported that about three in 10 workers have taken loans from their 401(k) plans.
And they become more common during extraordinary times, as the IRS noted after the 2008 financial panic in noting a 28 percent increase in those yanking money from individual retirement accounts over a 12-month stretch.
Only this month, Gov. Ned Lamont pledged to jump start a Connecticut effort to create a 401(k) option for small business owners to offer their employees, with the initiative having fizzled out last year for a lack of funding.