COVID-19, the CARES Act, and plan participants' response

October 30, 2020

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The definitive history of COVID-19's impact on retirement savings and participant behavior has yet to be written, but it's not too soon to share some lessons learned—lessons that, so far, are encouraging.

Some plan sponsors may find that optimism surprising given their understandable concern that the pandemic and the resulting Coronavirus Aid, Relief, and Economic Security (CARES) Act would negatively affect participant retirement savings.

However, analysis of our defined contribution (DC) recordkeeping data from January through September 2020 suggests that, while there have been negative impacts on retirement readiness, the response from participants has been better than expected, a finding for which plan sponsors can take some credit.

So, what does the data tell us?

Accumulating plan assets

Participation and deferral rates remained largely unchanged year-to-date through September when compared with the same period in 2019.

  • 12% of participants increased their payroll deferral percentage, versus 14% last year.
  • 7% of participants decreased their payroll deferral percentage, compared with 6% in 2019.
  • 3% of participants stopped contributing, the same as last year.
  • 24% of participants saw deferral rates rise because of automatic increases, compared with 23% in 2019.

Managing plan assets

Participant trading, while elevated, remained low year-to-date through September when compared with the same period last year. This behavior was also found when looking just at the trading of Vanguard Target Retirement Fund investors—although, as in 2019, that activity remained sharply lower than that of the overall participant population. In fact, Target Retirement Fund investors remained five times less likely to trade when compared with all other investors.

  • 8.1% of participants made an exchange, compared with 5.3% last year.
  • 2.9% of pure Target Retirement Fund investors made an exchange, compared with 1.9% in 2019.
  • 0.5% of participants "panicked" and abandoned equities, according to research we published over the summer.

Accessing plan assets

Coronavirus-related distribution (CRD) activity remained low for the year through September.

  • 4.5% of participants withdrew assets from their retirement plan through a CRD, while less than 1.0% of participants took a CARES Act loan.
  • The median participant CRD distribution amount was approximately $12,000.

Meanwhile, hardship withdrawals and loan activity decreased year-to-date through September when compared with the same period in 2019.

  • Hardship withdrawal activity was down 23%, compared with last year.
  • Loan activity was down 28%, compared with 2019.

Interpreting the data

Given this data, what lessons can we learn about participant behavior? We believe there are four takeaways that deserve broader discussion.

  1. The behavioral finance revolution that led sponsors to use negative elections, defaults, and human inertia to help drive better participant decisions, continues to improve participant outcomes. Participants are largely resilient and hard to deter from their long-term retirement goals. Once you default people into the plan at a high savings level, they largely don't make changes. This is not a new learning about participant behavior, but it has now been "battle tested" in a very unusual environment.
  2. Vanguard Target Retirement Fund investors are five times less likely to trade, even amid acute economic and market stress. This bodes well for participant outcomes because in times of volatility, the automatic rebalancing of Target Retirement Funds spares investors the emotionally challenging task of rebalancing on their own.
  3. The aggressive CARES Act loan and withdrawal provisions caused some concern among plan sponsors about leakage from their plans. However, the data shows very few participants utilized the remedy provided. Importantly, research we published this summer suggests that those who took a CARES Act distribution can recover from their retirement readiness gap by increasing their paycheck deferral amount by on average 1%.
  4. While use of the coronavirus-related distributions (CRDs) was low, the CARES Act retirement provisions do point to a need for greater emergency savings for many workers. It's a need that can be addressed with an advice offer that meets a full range of personalized financial goals, including debt management and emergency savings, among other things.

Turning interpretation into action

How can plan sponsors put these learnings to use? We believe there are three actions to discuss and consider.

  1. Ensure you have the most modern and strong plan design foundation. If you have not already, adopt the autoenrollment and autoescalation "smart plan design" features, and default participants into Target Retirement Funds. This can lead to the best retirement outcomes and can particularly benefit participants during periods of market and economic uncertainty.
  2. Act now to close the retirement readiness gap. Consider implementing a 1% autoincrease of payroll deferrals and also undersaver sweep campaigns to bring those not yet saving to the full employer match level.
  3. Prepare for future events that may affect economic security. Consider an advice offer, because a well-designed advice offer extends beyond portfolio outcomes to include other sources of value such as increased probability of achieving financial goals and improved overall sense of financial well-being for investors, according to our research.

Reflecting on a job well done

That's a lot to consider, but plan sponsors can already congratulate themselves. Over the past 10 to 15 years, the steady adoption of plan design best practices has largely solved many of the problems that have plagued 401(k) plans in the past.

As Vanguard's How America Saves research shows, participation rates, saving rates, and proper asset allocation and diversification as represented by the percentage of participants investing in Target Retirement Funds are all up. Now we have data that shows participant behavior during intense volatility is restrained and resilient.

None of this positive momentum would have been possible without the courageous actions of thousands of fiduciary committees making the tough and important decisions to provide for their employees.

Source: Vanguard.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.