Apples vs. Oranges

For retirement plan participants, financial crises are not all the same.
Reported by Rebecca Moore

Industry stakeholders have waited to see what participants in defined contribution (DC) plans would do after markets plunged in March due to COVID-19. Initial recordkeeper reports suggested these investors had learned to take a long-term view of their holdings. However, the Alight Solutions 401(k) Index for March showed participants were trading at record-high levels.

This is not the only way participants may react in a market crash, as past such events have shown. A look at our PLANSPONSOR Defined Contribution (DC) surveys from the Great Recession and shortly after shows, for example, that plan participation fell—from 73.8% in 2008 to a low of 69.7% in 2011 before rebounding to 72.6% in 2012.

“I don’t believe past trends can be implicative of what’s occurring now,” says Stacy Sandler, national leader for Deloitte’s retirement and wealth consulting practice in San Francisco. It is too soon to predict what will happen as a result of COVID-19, she says.

One clear difference between the current and that previous crisis is that President Donald Trump declared a federal emergency, and Congress passed legislation allowing participants to take from their plan account a penalty-free distribution—i.e., a coronavirus-related distribution (CRD)—and a loan larger than the IRS-permitted maximum. No similar provisions were enacted in 2008 through 2011.

At that time, the aggregate number of participants with outstanding loans jumped, from 12.8% in 2010 to 16.2% in 2011 and 14.2% in 2012, the DC surveys found. The percentage of participants who took hardship withdrawals, however, declined from 2.7% in 2009 to 2.1% in 2010, before rising to 3.6% in 2011.

Currently, withdrawals are more in demand than loans, Sandler says providers have told her. Some providers also report more in-service withdrawals than hardship withdrawals, she says.

Highest Unemployment Rate After Market Downturns

Source: The Balance

Participants Who Took Hardship Withdrawals

Source: 2019 PLANSPONSOR DC Survey: Plan Benchmarking

Participants With Outstanding Loans

Source: 2019 PLANSPONSOR DC Survey: Plan Benchmarking

Tags
covid-19, Great Recession, investor confidence,
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