What CARES Act withdrawals could mean for client retirement savings

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Clients who make withdrawals from their defined contribution plans under the CARES Act to cover coronavirus-related expenses may experience long-term financial strain.

Those who do not pay back that money back, as permitted by the act, could find a median of 20% less in their retirement accounts when they turn 65, according to research by the Employee Benefit Research Institute presented at their Virtual Policy Forum June 29.

For clients who are closer to retirement, it gets even worse, according to the research.

“That is a huge concern,” says Chantel Sheaks, executive director of retirement policy at the U.S. Chamber of Commerce, who spoke in the presentation. “There's already concern that people aren't saving enough.”

Under the CARES Act, clients impacted by the coronavirus — whether by contracting COVID-19 or being laid off — can withdraw up to $100,000 from their retirement savings from their defined contribution plan or IRA without incurring the 10% penalty. They have the option to pay back the distributions for three years, thereby spreading out tax liabilities.

Clients may be eligible to take a $100,000 loan from their retirement plan and extend their repayment period an additional year.

Paying back the withdrawals over the three-year period can minimize the effects of depleted retirement savings — clients who pay the money back will only lose about 2.3% of their retirement balances by the time they turn 65, according to Jack VanDerhei, research director of EBRI.

Even so, employers have concerns regarding implications of the policy, according to Sheaks. Because the CARES Act was modeled on California wildfire provisions, she says, firms are concerned it may have set a precedent for Congress to encourage clients to pull out of their retirement savings whenever a crisis arises.

“A lot of employers really are very worried that retirement plans are going to turn into piggy banks,” she says.

Sheaks also expressed concern over companies that had temporarily eliminated their retirement match due to the coronavirus and “when those [retirement matches] come back.”

On the other hand, COVID-19 has made clients acutely aware of their lack of retirement preparedness, according to Sheaks. “It's been making people think about the bigger picture,” she says.

Scroll through to see how clients are responding to COVID-19 and the potential long-term financial implications of their usage of the CARES Act provision:

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