Retirement Plan Industry Update – Q1 2020
April 22, 2020
Written by Dave Westra, Partner, CFP®, AIF®, CPFA and John Brimhall, Client Advisor, CFA, CPA, CFP®
The CARES Act: Relief for Retirement Plan Participants
On March 27, 2020 Congress overwhelmingly passed, and the President signed, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This fiscal stimulus package is designed to help businesses and families get through the unprecedented impact of the coronavirus (COVID-19). The act also provides enhanced distribution and loan options for affected retirement plan participants.
The CARES Act allows an eligible participant from a 401(k) plan (or 403(b) plan) to request a penalty-free distribution of up to $100,000 for qualifying coronavirus-related reasons1. Distributions processed anytime in 2020 can qualify. The following is a summary of the enhanced provisions:
- There are no age limitations to be eligible.
- The 10% penalty on early withdrawals is waived.
- The 20% federal tax withholding requirement at time of distribution is waived.
- The distribution if not repaid within three years, is taxable income, but individuals can spread their tax liability in equal installments over a period of up to three years.
The table below compares a distribution for an individual prior to 2020 to the CARES Act provisions:
Increased Loan Limits and Payment Postponement
The CARES Act expands the availability of plan loans and provides payment relief for qualifying coronavirus-related reasons1.
- A participant can take a loan for up to $100,000 or 100% of his or her vested balance.
- For new and existing loans, payments that are otherwise due between March 27, 2020 and December 31, 2020 can be postponed for up to a year. Interest continues to accrue, but the postponement can extend the otherwise applicable five-year cap on repayment.
Responsibilities for Tracking
- Coronavirus-related distributions and expanded loans are available as pre-approved transactions that are self-certified by participants.
- Plan sponsors are not required to review or approve these transactions.
Implementation and Plan Amendments
The CARES Act provisions highlighted above are optional. For those plan sponsors who choose to adopt these provisions, plan amendments are required by the end of the 2022 plan year.
1 Qualifying coronavirus-related reasons include:
- The participant must be diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; or
- The participant’s spouse or dependent must be diagnosed with such virus or disease by a test approved by the Centers for Disease Control and Prevention; or
- The participant must experience adverse financial consequences as a result of being quarantined, being furloughed, laid off, or having work hours reduced due to such virus disease, or being unable to work due to lack of childcare due to such virus or disease.
(Hoefer & Reay, 2020)
Retirement Plan Participants Remain Calm During the Recent Volatility of the Stock Market
According to a recent Morningstar study of more than 635,000 retirement plan participants, only 5.6% of participants changed their asset allocation during the first quarter of 2020. This is remarkable considering that the S&P 500 index was down 31% at one point in March.
Morningstar reported that the median 401(k) plan balance was down 11.2% during the first quarter. Morningstar also reported that 2.4% of plan participants in target date funds made an asset allocation change and 10.8% of participants “self-directed investors” made a change.
Empower Retirement, a leading retirement plan recordkeeper, reported that only 16% of plan participants checked their balances over the 30 days starting on February 24th.
Hoefer, D. & Reay, L. (2020). DWC News Update - The CARES Act: Federal Coronavirus Relief. Retrieved on April 21, 2020 from https://www.dwc401k.com/blog/cares-act-federal-coronavirus-relief-dwc-news-update
Steverman, B. (2020). U.S. Retirement Savers Stayed Calm While Stock Markets Plunged. Retrieved on April 14, 2020 from https://www.bloomberg.com/news/articles/2020-04-16/u-s-retirement-savers-stayed-calm-while-stock-markets-plunged
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