The coronavirus pandemic has revealed what survey data had reported for years, many Americans lack access to emergency liquidity. While a pandemic may be the most extreme case of liquidity need because it quickly impacted so many people, in day-to-day life other stressors reveal similar challenges financially. Unexpected medical expenses, home maintenance costs, childcare needs, or any of dozens other unbudgeted expenses, can put employees under significant financial stress.
While the stressors are undoubtedly personal, they do have an impact on employment and the retirement plan.
- 40% of Americans admit financial stress makes it difficult for them to concentrate at work
- Lost productivity and absenteeism from financial stress costs employers more than an estimated $1,900 per year, per employee
- 71% of Americans say the pandemic will negatively impact their retirement, with many dipping into their nest eggs, scaling back contributions, and planning to work longer
- Of low- to moderate-income participants, 5% have taken a retirement plan distribution as a result of COVID-19 and another 7% intend to do so
Defined contribution plans are inefficient emergency savings instruments. Distributions are subject to tax, and the unpredictable timing of needs may expose distributions to material market risk as most retirement plan participants have significant equity allocations as part of their long-term retirement strategies.
The last several decades have seen steady increases in both loan availability and utilization by participants, a strong signal that participants are using retirement savings for more present financial needs. However, the CARES Act may forever alter how participants view tax-deferred retirement savings.
Fed statistics show that retirement plan wealth accounts for 70.3% of the net worth of the middle class, defined as people ranking in the 20th through the 80th percentiles in terms of wealth. Arguably, for the poorest 20% of the U.S. population and for much of the middle class whose wealth is tied to retirement accounts, in the absence of a broader emergency savings solution retirement plans will continue to serve a dual mandate of providing for retirement and protecting from an emergency.
The time is ripe for employers to evaluate new and innovative strategies to improve the health, performance, and stability of their employee population. Whether integrated within a retirement plan or standing beside it, integrated emergency saving programs provided by employers can reduce economic anxiety materially.
It can be argued that these issues should be solved at the federal or state level, but a relief in that regard appears unlikely. Employers looking to fundamentally change the financial success of their employee population may need to consider the same behavioral finance solutions that have increased retirement plan participation, savings rates, and performance over the preceding decade.
 John Hancock Retirement
 John Hancock Retirement
 TDAmeritrade 2020
 Saving Through a Crisis: How LMI Retirement Plan Participants Are Weathering COVID-19
 Washington Post, Allan Sloan “Lucky enough to have a pension? The Fed low interest rates mean it many no longer guarantee a secure retirement” October 21, 2020
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