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ASPPA: Hardship Withdrawals Not Widespread, Studies Say

August 3, 2020

The ASPPA published an article focusing on the data from the survey around hardship withdrawals - citing the DC Flash Poll. You can read the piece here. 

PRACTICE MANAGEMENT

The economic strains occasioned by the pandemic have had wide-ranging effects, and one of the actions put in place is to ease the rules concerning hardship withdrawals and loans. But availability has not made them a widespread response to economic challenges, recent studies have found.

Loan and hardship distribution usage was relatively low in 2019, says T. Rowe Price in its Reference Point Annual Benchmarking Report. They report that while hardship distributions did grow in 2019, they only did so by 1.5%. They attribute the low levels to improved market conditions.

Still, the average size of hardship distributions in 2019 grew by more than 10%, says the report. T. Rowe Price says that the average loan balance increased to $9,525, but that the number of plan participants with an outstanding loan balance hit a “new low” of 22.1%, down from the seven-year high of nearly one-quarter of participants having a loan balance in 2013. They add those participants in the 40-49 and 50-59 age groups had the largest loan balances in 2019 due to the many demands on their finances at that time in their lives.

Slightly fewer plans allowed loans in 2019 as well, T. Rowe Price says—88.6%, 0.3 percentage points fewer than had done so the year before.

Enter the CARES Act

In March 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. That measure includes provisions concerning loan and distribution options; for instance, if a plan allows it, a qualifying individual may take a plan loan up to the lesser of $100,000 or 100% of the participant’s vested account balance. This only applies to loans made on or before Sept. 23, 2020 (180 days following enactment of CARES).

In the first two months after the CARES Act was enacted, according to Vanguard in “How America Saves 2020: The CARES Act—an Update on Distribution Activity and its Impact," 99% of the plan sponsors that had responded to their inquiries were allowing participants to make coronavirus-related distributions, and 83% of them were allowing both current and former employees to do so.

In its report, T. Rowe Price expressed the view that the CARES Act could result in an increase in the number of loans and disbursements and reverse some of the “improved behavior achieved in 2019.” But NEPC’s findings in its July 2020 Defined Contribution Flash Poll suggest that so far, those concerns may not be coming to fruition. NEPC says that 91% of the plan sponsors it surveyed reported that less than 5% of Americans made an early withdrawal from their retirement account. Further, 51% don’t expect that to be an increase in coronavirus-related distributions this year.

In the first two months after the CARES Act was enacted, according to Vanguard, just under 2% of the plan participants who could withdraw funds under the CARES Act had done so. Of the participants who took such distributions, 91% took just one, while 9% took more than one.

Vanguard further reports that the average distribution was $20,690 and the median distribution was $10,413. The majority of the distributions were for $20,000 or less; 66% of the distributions were at that level, and nearly 30% were for less than $5,000. Just 4% of the participants in plans sponsored by the respondents to Vanguard’s study took the maximum allowed under the CARES Act of $100,000. Participants who made a withdrawal took an average of 60% of their balance.

Topics: Press, Press Coverage

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