There was an increase of withdrawals made by workers from their retirement accounts in the closing months of 2020 presumably to meet the additional economic challenges presented by the COVID-19 coronavirus pandemic, but those withdrawals were more modest than originally expected. This is according to original reporting at the Wall Street Journal.
Last March, the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided for a retiree to be able to take a coronavirus-related distribution of up to $100,000 from a retirement plan or IRA without the normally-included 10% early withdrawal penalty if under the age of 60, while the bill also relaxed rules around retirement plan loans, allowing borrowing of up to double the previously-allowed amount – a maximum of $100,000 – from a 401K plan.
The option for withdrawals from retirement or IRA plans was not widely utilized by qualifying Americans, according to Fidelity Investments.
“Fidelity and many other 401K record-keepers reported that although the number of people taking COVID-19-related withdrawals continued to grow in the final three months of 2020, the rate of increase was modest and largely in line with what occurred in earlier months, even as the option to take a penalty-free withdrawal ended on Dec. 31,” WSJ reported. “An additional 1% of 401K participants at Fidelity took what is known as a hardship distribution in 2020. These allow withdrawals for reasons including buying a home, preventing foreclosure or paying medical bills. In a typical year, about 2% take a hardship distribution.”
A similarly-lower level of utilization was seen at Fidelity rival Vanguard Group, where 5.7% of eligible participants took penalty-free withdrawals because of the COVID-19 pandemic, with 1.7% having done so on hardship grounds last year. At T Rowe Price Group Inc., 8% of eligible people inside plans it administers with assets over $25 million took at least one withdrawal “because of the pandemic,” WSJ details, as did 6% of people with 401K plans administered by Alight Solutions, LLC.
“Given how many people have been impacted by COVID, 6% can be viewed as good news,” said Rob Austin, director of research at Alight to WSJ. Since unemployment rates saw a spike to high levels last spring with the onset of the pandemic, it was expected that as many as half of those in Alight 401K plans could’ve followed suit, he told the outlet.
Withdrawal rates appear to be lower since the economic hardship of the pandemic has disproportionately impacted lower income workers, and such workers are far less likely to have access to — or to be enrolled in — 401K plans. This is according to Brigitte Madrian, economist at Brigham Young University. As much as one-third of private sector workers have no access to a workplace retirement savings plan.
Read the article at the Wall Street Journal, subscription required.