A small group of John Hancock retirement plan participants are withdrawing significant amounts of money from their plans to pay coronavirus-related expenses, according to John Hancock Retirement.
The withdrawals were large enough to significantly hurt the person’s retirement, John Hancock said in a retirement report, “State of the Participant 2021,” released Thursday.
Although only 3.4% of plan participants withdrew money from their retirement savings, the withdrawals averaged $20,768. “As transactions of this size can significantly hurt retirement readiness it is important to understand the scope of the issue, even if it’s only having an impact on a relatively small share of the population,” John Hancock Retirement said in the report, “State of the Participant 2021.”
An even smaller group, 0.15% of John Hancock retirement plan participants took Covid-related loans with loans averaging $16,699.
The withdrawals and loans have become a more popular option in part because the CARES Act provided for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans in 2020. Those providsions did not extend into the 2021 tax year.
”Those who have taken a coronavirus-related distribution should consider replenishing their accounts as soon as possible,” the report said. “We have calculated that failure to pay back a distrution can cost the average participant 10% or more of their potential account balance at retirement.”
Although some people turned to their retirement plans for needed financial help, defined contribution plans, for the most part, continued to perform their critical role in preparing workers for retirement in 2020 although there was a dip in retirement readiness from approximately 49% to 48%. “Considering the year, the dip does not seem too alarming, although it is certainly worth monitoring closely,” John Hancock said.
“Most participants below age 50, along with those earning between $50,000 and $150,000 per year, remain on track for a secure retirement,” the report said.
Automatic enrollment and automatic contribution increases have increased participation in employer-sponsored retirement plans are indispensable in helping shape a ‘save more’ attitude among employees. “Auto features—such as auto-enrollment and auto increase—are among the most successful strategies for boosting contribution rates and retirement readiness,” the report said. “Plans that combined these auto features enjoyed an eight percentage-point advantage in preparing participants for retirement, than plans with no auto features.”
The report noted that plan participants are motivated by personalized retirement projections. For example, of those under 30 years of age, who completed a personalized retirement plan, 23% increased their contributions by an average of nearly 5 percentage points. For those age 50 to age 59 who completed a plan, 22% increased their contributions by an average of 5.1 percentage points.