How 401(k) participants responded to the CARES Act and market volatility in April

Because the Coronavirus Aid, Relief, and Economic Security (CARES) Act and its retirement plan provisions became effective on March 27, 2020, April offered us the first full month of data to see what actions people are taking. By allowing plans to temporarily ease rules on withdrawals and loans, and by temporarily removing the mandate to take required minimum distributions, the CARES Act offers participants some means of financial relief. We took a look at our participant data to find out what they're calling about and which of the CARES Act's provisions they're taking advantage of.

Participant calls

Although call volumes into our participant service center haven’t increased over the last few months, the CARES Act is top of mind for many participants. The number of calls about loans and withdrawals was about the same month to month, but in April, coronavirus-related distributions (CRDs) and loans were among the top reasons for those calls.

Contribution rate changes

Only 3% of participants decreased their contribution rate in April, and although that's still more than the 2% of participants who decreased their rate in April 2019, it's still a small percentage (as is generally the case).

Loans

The number of participants taking loans from their 401(k) in April actually went down compared with both March 2020 and April 2019, but the average loan amount went up 7%, to $12,433. With the CARES Act, plan sponsors can temporarily raise the loan limit to the lower of $100,000 or 100% of the account balance (from the usual limit of $50,000 or 50% of the balance).

Under the CARES Act, withdrawals of up to $100,000 are permitted without triggering the normal 20% withholding tax and 10% early withdrawal penalty if participants certify that either they or a spouse were diagnosed with COVID-19 or have suffered adversity related to the quarantine, a work furlough, or other hardships. 

April was really the first month that anyone had access to a CRD, as the CARES Act became effective at the end of March and it took some time for plan sponsors to adopt—or decide not to adopt—the provision. For the purpose of our analysis, we’re comparing CRD activity to in-service withdrawal activity.

CRDs are driving a huge increase in withdrawals, as April withdrawals (CRDs and in service combined) are more than 200% greater than those taken in March 2020 or in April 2019. As of May 12, the number of CRDs taken in that month had already surpassed the number for all of April.

Investments

We also see big changes in participants' investment behavior. Sixty-three percent more participants made changes to the types of investments in their 401(k)s this April compared with last April, and they're making very different changes this year, with some seeking to capitalize on the down market and others seeking shelter from the volatility. The number one investment change this past month was to move out of stable value and into a diversified fund.¹ 

The actions taken varied greatly by age group. Although the investments they chose within each strategy varied, generally, younger people stayed in the market and older people were more conservative. Even so, we saw almost as many people in their 50s and 60s moving out of stable value and fixed income compared with into them—again showing that, while some are seeking shelter, others see potential opportunity in the down market.

The new normal has spurred a good deal of activity among retirement plan participants, with large increases in people using their plans for liquidity and in making changes to their investment strategies. The suddenness of the current crisis and swift action of Congress with the CARES Act may have caught many participants with inadequate knowledge of how to respond. 

It's not too late for retirement plan professionals and educators to help participants understand how to respond to market volatility and how to weigh the pros and cons of taking loans and withdrawals from a retirement plan. That's not to say that people shouldn't take advantage of CARES Act provisions—and other potential help that may come from Congress—as the eased rules may be a lifeline for many. But plan professionals should make sure that anyone taking action is doing so with a full understanding of the implications. 

All data, unless otherwise indicated, is John Hancock’s internal data, as of 4/30/20.  

1 Fund categories were defined as target-date fund, stable value/income, growth and income, equity, asset allocation, and other. A participant in more than two fund categories was labeled diversified. A participant who changed from more than two fund categories to greater than two other categories or to asset allocation alone was labeled as having rediversified.