Perspectives : Fiduciary Regulatory | January 28, 2021

Revisiting the CARES Act and its impact on retirement savings

As COVID-19 sent shock waves through the global economy, Congress in March 2020 passed the largest economic relief effort in modern American history—the Coronavirus Aid, Relief, and Economic Security (CARES) Act. A wide-ranging law, it included provisions intended to support the health care system's fight against the coronavirus and expand unemployment insurance. It also provided for direct payments to individuals, loans to small and large businesses, and support for state and local governments.

Incorporated within the bill were several provisions that provided flexibility for retirement savers, including coronavirus-related distributions (CRDs). Individuals affected by the coronavirus¹ were able to withdraw up to $100,000 from their retirement plan penalty free until December 30, 2020. In addition, the income tax due on these distributions is allowed to be spread over a three-year period, and investors have three years to return the funds to their account.

At the time of its passage, some in the retirement industry were concerned that, while relief was needed, this bill would "open the floodgates" to a large percentage of workers cashing out years of retirement savings. Fortunately, this did not happen.

Analysis of Vanguard defined contribution (DC) recordkeeping data shows a modest portion of workers did access their retirement savings in 2020, but that the vast majority of participants remained steadfast on their retirement journey.

Accessing retirement savings

Plan sponsors were given the option to permit CRDs throughout 2020. Of our sponsors, 73% permitted their participants to access retirement funds if needed. Of the participants offered the option to withdraw assets, 5.7% accessed a portion of their savings. Of those who initiated a withdrawal, 69% took one distribution, while 31% initiated multiple distributions over the nine months.

Retirement plan access and CRD withdrawal activity in 2020

Note: This hypothetical illustration does not represent the return on any particular investment, and the rate is not guaranteed. The final account balance does not reflect any taxes or penalties that may be due upon distribution. Withdrawals from a tax-deferred plan before age 59½ are subject to a 10% federal penalty tax unless an exception applies.

How much did participants withdraw?

The average distribution was $15,700, and the median was $6,500. However, as nearly one-third of participants who initiated a withdrawal took multiple distributions, the average participant distribution was approximately $24,600, with a median of $13,300.

Nearly 1 in 4 participant distributions were for less than $5,000, and 60% of all withdrawals were for less than $20,000. Withdrawals of more than $30,000 were less common, and only 4% of participants who initiated a CRD withdrew the maximum amount of $100,000.

When examining the distribution amounts based on the percentage of a participant's balance, the average distribution represented 55% of a participant's total balance. About 1 in 4 distributions were for nearly all or 100% of the account balance, whereas one-half of withdrawals were for less than 50% of their balance.

Participant adoption rates also varied by demographics. Participants between the ages of 35 and 54 were the most likely to initiate a CRD, while younger and older participants were less likely. Participants with an income between $30,000 and $75,000 were also more likely to request a CRD, and participants with a lower or higher income were less likely. Participants with an account balance between $10,000 and $50,000 were more likely to request a CRD when compared with those with larger account balances.

When examining adoption by sector, participants in the transportation, utilities, and communications industries were most likely to initiate a withdrawal (10.6%), as well as participants in the agricultural, mining, construction, and manufacturing industries (8%). Participants in business, professional, and nonprofit industries were the least likely to access plan assets (2.3%).

The corrective power of plan design

As of year-end 2020, 54% of all plans automatically enrolled their employees. When segmenting the participants by plan design, 6.4% of participants in automatic enrollment plans initiated a CRD, compared with 4.5% in voluntary enrollment plans.

Automatic enrollment is a proven plan design feature that improves employee saving and investment behaviors. However, it is important to note that as plans have increasingly implemented automatic solutions in an effort to improve retirement outcomes, more participants now have an additional resource that may be accessed in times of emergency.

Accessing plan assets before retirement should be a last resort for participants. And while a small fraction have accessed their retirement savings, those participants, who may have faced a financial shock, are better off than those who did not have any retirement savings cushion during this period.

Calculating the impact on retirement

Participants who accessed their retirement assets early may experience a shortfall upon reaching retirement. As previously mentioned, the median participant distribution amount was $13,300. The median age was 42, and the median income was about $61,400. Assuming a real investment return of 4%, the median participant distribution would grow to approximately $35,000 over the next 25 years. For the typical participant, this return would represent the future financial impact at retirement.

As affected participants consider how to close this shortfall, the amount by which they may need to increase their savings depends on various factors, such as distribution amount, time until retirement, and earnings. Based on the median amounts, or the typical participant, many of them could cover this potential shortfall simply by increasing their deferral rate by one percentage point. And while many participants may not be ready in the short term to increase their retirement savings contributions, it is important for them to recognize this shortfall and, when their financial situation improves, take appropriate action.

In addition, as the economy stabilizes, plan sponsors may leverage various types of automatic solutions, such as automatic annual increases and undersaver sweeps, to help participants who accessed their plan assets as well as those who did not.

Reasons to be hopeful

Last year was unprecedented—worldwide. The flexibility provided by the CARES Act allowed for additional financial options for workers with retirement savings to prepare for unforeseen circumstances. While this added flexibility is helpful to many, it is encouraging that the vast majority of participants did not access their retirement savings during this crisis and are "staying the course" on preparing for retirement.

Less than 6% of participants have withdrawn assets, with the typical participant accessing about $13,300. Recovery from such an early distribution can be achieved with marginal increases to savings and sufficient time to retirement.

Participants' reactions to the CARES Act options highlight the important role automatic solutions continue to play in retirement plans. In addition to the many savings and portfolio construction benefits of automatic enrollment, smart plan design has also provided many employees with an additional source of emergency money. It's yet another reason to consider automatic solutions, which have continued to gain in popularity among plan sponsors. If you have any questions about the CARES Act, please contact your Vanguard representative.

¹ An "affected individual" is defined by the CARES Act as someone:

  • Who is diagnosed with COVID-19 by a CDC-approved test,
  • Whose spouse or dependent is diagnosed with COVID-19 by a CDC-approved test, or
  • Who experiences adverse financial consequences as a result of being quarantined; being furloughed, laid off, or having work hours reduced as a result of COVID-19; being unable to work due to lack of child care due to COVID-19; closing or reducing hours of a business owned or operated by the individual due to COVID-19; or
  • Other factors as determined by the Treasury Secretary.


  • All investing is subject to risk, including the possible loss of the money you invest.