a couple sits in living room reviewing financial documents

For retirement savers, hindsight is ‘2020’

Jun 7, 2021
Empower Institute

What early CARES Act distributions can teach employers about their employees

For a large segment of the American population, the COVID-19 pandemic has been a time of financial hardship. As a result, many employees have turned to alternative sources of income to cover essential expenses like rent, monthly bills and healthcare costs.

According to Empower research, some Americans have taken advantage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act provision to draw from their retirement accounts early. New Empower data shows that while some of these employees have used the money to pay for trips or make major purchases, most have used it to cover basic needs or pay off debts.

By better understanding employees’ financial decisions over the last year, employers can determine how to support them going forward.

How employees spent early retirement withdrawals

The CARES Act allowed individuals under the age of 59½ to withdraw as much as $100,000 from their retirement accounts without paying the 10% penalty normally faced by savers who withdraw funds early. Only about 4.4% of eligible participants in an Empower plan completed CARES Act withdrawals in 2020. Still, that figure represents more than 500,000 CARES Act withdrawals.

According to a new survey conducted by the Harris Poll on behalf of Empower Retirement, people who took early distributions spent them on a variety of expenses, such as:

  • Basic needs like food and rent (36%).
  • Paying off debt (35%).
  • Padding their savings account (31%).
  • Creating or adding to an emergency fund (23%).

Why some employees tapped into their retirement savings

Employees who called Empower to discuss CARES Act withdrawals had many different reasons for their interest in withdrawing retirement money early, including:

  • Job loss or impending job loss.
  • Inability to access social services.
  • Increased expenses due to the pandemic.
  • Distrust in the markets.

Most employees see early withdrawals as a last resort

A July 2020 survey conducted by the Harris Poll on behalf of Empower Retirement found that most employees would consider several other options before resorting to taking money out of their retirement accounts.

More than a third of respondents who hadn’t had to cope with COVID-related financial challenges said if they needed access to additional funds, their first step would be to reduce spending. A fifth (20%) said they would start by dipping into their savings or emergency fund, 13% said they would defer a student loan payment, and 12% said they would sell something of value.

Just 12% said their first step would be to stop contributing to their retirement savings while only 8% said they would first take money out of their workplace retirement savings accounts.

How employers can better support their employees

Employers who educate their employees about their options can help them avoid the worst financial consequences of the COVID pandemic — and better prepare them for future challenges.

Employers can provide employees personalized advice offerings that evolve based on the unique needs of each employee. These solutions should incorporate sophisticated technology, be backed by human interaction and use event-driven communications to give employees the support they need to make smart retirement savings decisions.

Employers can also make employees aware of assistance programs. And they can remind employees who withdrew from their retirement accounts early that they can restore their savings by paying back their distributions.

Key takeaways:

  • About 500,000 Empower plan participants took advantage of the CARES Act provision that allowed for early withdrawals from retirement accounts without the 10% penalty.
  • Employees had many reasons for withdrawing funds, but most used the money for basic needs, like food and rent, and for paying off debt.
  • Most employees see early withdrawals as a last resort during times of financial hardship.
  • Employers can help support employees by educating them on all their options and providing personalized advice and solutions.
research paper download. For Retirement Savers, Hindsight is ‘2020’

Download research paper 

Latest Empower Institute Articles

husband and wife at home speaking with financial advisor
Sep 30, 2021
Empower Institute

Complements, not substitutes

Based on this analysis, participants do not consider managed accounts to be substitutes for target date funds.

Carefully consider the investment option’s objectives, risks, fees and expenses. Contact Empower Retirement for a prospectus, summary prospectus for SEC-registered products or disclosure document for unregistered products, if available, containing this information. Read each carefully before investing.

Securities, when presented, are offered and/or distributed by GWFS Equities, Inc., Member FINRA/SIPC. GWFS is an affiliate of Empower Retirement, LLC; Great-West Funds, Inc.; and registered investment adviser, Advised Assets Group, LLC. This material is for informational purposes only and is not intended to provide investment, legal or tax recommendations or advice.

IMPORTANT: The projections, or other information generated on the website by the investment analysis tool regarding the likelihood of various investment outcomes, are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. The results may vary with each use and over time.

Investing involves risk, including possible loss of principal.

Insurance products are issued by or offered through Great-West Life & Annuity Insurance Company, Corporate Headquarters: Greenwood Village, CO; or in New York, by Great-West Life & Annuity Insurance Company of New York, Home Office: New York, NY. Guarantees are subject to the terms and conditions of the contract and the claims-paying ability of the insurer.

The managed account service is part of the Empower Retirement Advisory Services suite of services offered by Advised Assets Group, LLC, a registered investment adviser.

The Empower Institute is a research group within Empower Retirement, LLC.

All features may not currently be available and are subject to change without notice. ©2021 Empower Retirement, LLC. All rights reserved.

Unless otherwise noted: Not a Deposit | Not FDIC Insured | Not Bank Guaranteed | Funds May Lose Value | Not Insured by Any Federal Government Agency.