Grant’s Go-To’s: SFRP Withdrawals - Pandemic Panic or Panacea?
After writing recently about early withdrawal options for state-facilitated retirement savings programs (SFRPs), I got to thinking about whether the pandemic might have led to increases in the number of people tapping into retirement accounts to help pay the bills.
The Federal CARES Act allowed people to take up to $100,000 out of their accounts without the 10 percent early withdrawal penalty for people under the age of 59 ½. It appears that not too many did so. Anne Tergesen’s January 20, 2021 Wall Street Journal piece, Americans Aren’t Draining Their Retirement Funds in the Pandemic, indicates the number of people taking early withdrawals has been lower than expected. Fidelity and Vanguard report that about 6 percent of participants in their plans took early withdrawals, and the increase in hardship withdrawals was slight.
Is the picture different for state-facilitated retirement savings programs (SFRPs)? One might expect so given that compared to 401(k)s, SFRPs disproportionately serve lower income workers hit harder by pandemic-related un- and underemployment. Additionally, the three programs in operation today offer Roth IRA accounts, which allow penalty-free withdrawals of the funds contributed.
Despite concerns about spikes in withdrawals, however, Pension and Investments in its June article Secure choice plans chugging along despite pandemic reported that contributions levels remained steady or even increased slightly, and increases in withdrawals were lower than expected and have subsided. CalSavers and OregonSaves, both of which have been continuing to phase in participation requirements for smaller employers during the pandemic, delayed some of their deadlines in acknowledgment of the difficulties faced by small employers.
Program executives interviewed for the P&I article hypothesized that federal stimulus checks and enhanced unemployment benefits may have tempered the effect of the pandemic. CalSavers executive director Katie Selenski also suggested the newness of the programs may mean participants have not yet become aware of their accounts as a possible source of funds available to tap.
An October 20, 2020 article by Pew reported that as a percentage of program assets, withdrawals from OregonSaves ranged from 2% to 2.5% in the months prior to the pandemic, rose to almost 4% in March, then fell to 1.4% in April. Pew’s researchers are not certain as to why withdrawals fell in April. They do note, however, that extended deadlines for new employers might have some role. When new employers (and their employees) are added to the program, a percentage of new employees will decide not to continue after making their first few contributions. Thus, delaying the onboarding of new employers could be lowering the withdrawal rate.
Given the relatively short time that CalSavers, Illinois Secure Choice and OregonSaves have been in existence, it may be too early to draw definitive conclusions as to why the pandemic hasn’t had a greater impact on contributions and withdrawals. Nonetheless, the result is a good one and an early indication that SFRPs can continue to help workers build for a secure retirement even through a significant economic downturn.
Stay tuned! / Grant
This piece was featured in the May 20, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
