Fidelity Finds Resilient Retirement Savers in Pandemic

89% of 401(k) Participants Hold Contributions Steady

Senior couple paying bills at home - stock photo


MoMo Productions

Despite the pandemic economy, only a small fraction of Fidelity Investments’ customers have needed to tap into their 401(k) retirement savings early, and the vast majority avoided scaling back contributions in the third quarter, a new analysis of their data shows.

Key Takeaways

  • Despite the pandemic economy, 89% of Fidelity customers didn’t make any changes to their 401(k) contributions in the third quarter.
  • A fraction of those eligible have made early withdrawals from their workplace retirement account under a CARES Act provision that waives the penalties.
  • Fidelity’s data may not reflect the uneven economic recovery, since it only takes into account people who are still employed and have a retirement savings plan.

Between March and September, 1.2 million Fidelity customers in the U.S.—or 4.6% of those eligible—had made early withdrawals from their 401(k) and 403(b) retirement accounts under special emergency provisions waiving the penalties because of the COVID-19 crisis, the company said in a report released Thursday.

Meanwhile, 89% of those with a 401(k) account kept their contribution rate unchanged in the third quarter, and 8.6% actually increased the amount they’re saving for retirement. Only 2.4% cut back, Fidelity said.

“That speaks to the resiliency of people, in general,” said Taylor Sundeen, a certified financial planner with Great Waters Financial. “When things get tight, people cut discretionary spending to keep savings intact.”

The numbers show a commitment to retirement savings despite the tumultuous economy created by the COVID-19 pandemic, according to Jeanne Thompson, senior vice president at Fidelity Workplace Consulting. Recent data from Vanguard Group show very similar withdrawal figures for the same timeframe.

Still, the data may belie the country’s uneven recovery, since it only reflects people who are still employed and have workplace retirement savings plans. While the unemployment rate has been improving since the spike seen in the early days of the COVID-19 crisis, the October rate of 6.9% was still about twice what it was before the pandemic, and 11.1 million people remained out of work.

Lower-income workers have been particularly hard hit by the pandemic’s economic shock because they’re less likely to have jobs they can do from home and more vulnerable to layoffs. A third of U.S. adults surveyed in August said they had dipped into savings or retirement accounts in order to pay bills, according to the Pew Research Center. 

CARES Act Withdrawals

Under the CARES Act, a government relief package passed at the outset of the pandemic, eligible savers younger than 59 ½ can withdraw up to $100,000 from their retirement savings this year without having to pay the 10% penalty tax that would normally apply. Withdrawals have to be paid back within three years in order to avoid income tax payments on the amount withdrawn. 

Of the 1.2 million Fidelity customers who had taken advantage of the provision through September, 489,000 initiated their withdrawal in the third quarter, a Fidelity spokesman said. On average, they withdrew $9,000, though the median was $2,400.

Not surprisingly, because of the CARES Act provision, Fidelity saw a decline in interest in borrowing from 401(k)s in the third quarter, with just 1.9% of workers taking out loans.

“With fewer people taking out loans, going into 2021, that means there will probably be fewer outstanding loans,” Fidelity’s Thompson said. However, maintaining that decrease may depend on what happens with the economy, development of a coronavirus vaccine, and getting more Americans back to work, she said. The CARES Act provision only applies to 2020 withdrawals.

“In the current economic environment, many people are still facing challenges,” she said, noting Fidelity is closely monitoring whether both CARES Act withdrawals and loans increase. 

Indeed, both may be options for households struggling with their finances. A June poll from the Transamerica Center for Retirement Studies showed that 28% of U.S. adults surveyed had taken or planned to take out either a loan or a withdrawal from a 401(k), IRA, or similar retirement account. 

Holding Steady Amid Uncertainty

After the stock market came roaring back from a bear market triggered by the pandemic earlier in the year, benchmark indexes set new record highs and optimism seemed to soar. But then the market whipsawed investors in September, with tech stocks falling into a correction and the labor market recovery slowing. 

Great Waters' Sundeen said he has advised his clients to stick with their pre-pandemic strategy this year, or reduce the amount they’re contributing, if necessary. He steers those who need money away from drawing on their retirement savings if they can avoid it, using it only as a last resort in a time of need.

“I’ve found that people are using other resources to tighten up the belt, if you will,” Sundeen said.

A boring strategy is often the best course, especially if people feel overwhelmed by everything else happening in the world, according to Brad Klontz, a financial psychologist and certified financial planner who has co-authored books on the psychology of money. 

“Usually the right move is not to make decisions during the midst of emotional upset,” Klontz said.

Potential Red Flags

Klontz sees one possible sign of some fear-induced behavior in Fidelity’s analysis: Baby Boomers making changes to their asset allocation (their mix of stocks, bonds and other assets) when they are so close to retirement. 

Fifteen percent of Baby Boomers made some sort of change to their 401(k) asset allocation in the 12 months through September, more than the 9%-11% the company usually sees among 401(k) participants, Fidelity said. 

In fact, in the third quarter, 38% of Boomers had a 401(k) allocation in the stock market higher than suggested for their age group, with 7% holding all their invested assets in stocks, according to Fidelity.

While it would be difficult to pinpoint the reason for such allocation changes (some could have been planned out in advance) Klontz said asset allocation changes are typically “a big red flag.”

“They may be inappropriately responding emotionally out of fear, and that’s a classic investing mistake,” he said. Given the market’s decline and how quickly it rebounded this year, these savers may have sold stocks at the worst time since 2009, depending on their timing, he said. 

In the midst of a crisis, people automatically get better at saving for the short-term, Klontz said, including by finding new ways to free up cash or cutting back on spending. But it will be interesting to see whether those habits will translate into more long-term planning for things like retirement. 

“The big question is whether they’re going to use that extra savings to contribute more to investments or to their savings account,” he said.