The COVID-19 pandemic has provided a case study for how people treat their retirement savings if given penalty-free early access to them.

Under the CARES Act, 401(k) savers have been able to take emergency withdrawals of up to $100,000 from their accounts, without the normal 10% penalty that comes on top of taxes.

But people only tap into their accounts if they’re aware of that option, and they’re more likely to be aware of the option if they’re the type of investors who manage their own allocations — not like the majority of participants who are defaulted into target-date funds, according to a research paper published Tuesday.

Data provided by Empower Retirement show that people who managed their own allocations were significantly more likely to call the record keeper about early withdrawals than people in either target-date funds or those who opted for managed accounts, according to the paper. The research was authored by Morningstar Investment Management head of retirement research David Blanchett, The American College of Financial Services professor Michael Finke and Empower Retirement financial planning research director Zhikun Liu.

The analysis is based on data from nearly 2.2 million calls to Empower between Jan. 1 and July 7.

Inquiries about early withdrawals increased sharply this year among all three types of participants — those defaulted into target-date funds, those opting for managed accounts and people who build their own portfolios, according to the report.

Generally, people working in industries with high unemployment resulting from the pandemic — including retail, food service, transportation and entertainment — were more likely to ask about early withdrawals than those with higher job security. Industries with lower unemployment include utilities, agriculture and finance real estate.

But increases in such requests were highest among people who handle their own 401(k) allocations — there was a 215% rise in those calls among people working in high-unemployment industries and a 156% bump among those in fields with lower unemployment, the report noted.

“These descriptive results suggest that employees in all three account types increased phone volume after the pandemic-induced market volatility of March 2020, but self-managed employees in occupations with the highest likelihood of an income shock were far more responsive than those in more stable industries,” the report read.

People with higher income levels and account balances were also less likely to request early withdrawals, the data show. The CARES Act essentially yielded a study on rainy-day savings, the authors noted.

“The act turned an employee’s retirement savings plan into the equivalent of a rainy-day fund, albeit one that was not explicitly labeled as such,” the paper read. “The CARES Act gave workers access to emergency savings but did not provide an easy pathway for them to recognize that retirement savings were now essentially liquid.”

This presents a question for policymakers, the authors wrote.

“Passive savers may be better able to accumulate funds in default rainy-day accounts because they don’t have to choose to save or avoid the temptation to consume their liquid savings,” the report read. “However, when these savings are needed to fund an unexpected income or spending shock, individuals must be aware of their ability to access rainy-day savings dollars.”


Although only a small percentage of retirement savings have taken CARES Act withdrawals, the increase is part of a trend in the U.S. defined-contribution plans. Even before the pandemic, people have tapped into their accounts early, given a lack of emergency savings, said Brigitte Madrian, dean of the Brigham Young University Marriott School of Business, speaking Thursday at the Defined Contribution Institutional Investment Association’s Academic Forum.

Eight years of data from one large employer found that, for workers who were not automatically enrolled in plans, account balances averaged 19% of an employee’s first-year pay. Account balances would have been higher, but early withdrawals, plan loans and rollovers sapped the equivalent of 9% of pay from the accounts, on average, Madrian said. For the workers who were automatically enrolled, account balances were higher on average after eight years, though a similar amount of assets left the plan during that time, she said.

In the U.S., average retirement wealth decreases by 15% to 20% due to money flowing out of accounts early, she said.

Options to address the problem include having people contribute a higher percentage of their pay, restricting their abilities to take withdrawals or adding features like emergency savings accounts, she said.

Support for the effectiveness of emergency accounts are seen from other research on pay for low-wage workers in India, who received cash every week in either one or two envelopes and had a high or low savings target. While having a higher target had a very modest impact on savings rates, those who received their pay split into two envelopes were much more likely to have savings than those who got paid the same amount in just one envelope, Madrian noted.

Once an envelope is opened, people were more likely to the spend the money, she said.

In the U.S., DC plans could be made much more portable, so they are tied to individuals rather than employers, she said. That would make it easier for people to track their assets and not be tempted to take early withdrawals from small accounts, she said.

“Individuals are much more likely to take money out of the system if it is a small account balance,” she said. “It doesn’t seem like an injustice to your future self if the account balance is small.”

Making emergency-savings accounts part of workplace benefits could help, particularly if enrollment is automatic. That could work as part of the 401(k) plan, as a Roth option or within an outside bank savings account, Madrian said.

“We’re much more likely to facilitate good savings outcomes when we make saving for retirement or saving for a rainy day much easier to do,” she said.


As a result of the financial stress that the pandemic has caused for workers, employers are becoming much more open to the idea of emergency savings accounts, according to results of a survey this week by Prudential Financial.

Among 666 plan sponsors surveyed between April and June, 23% said they plan to add emergency-savings vehicles to their plans. Employers also said they want to make 401(k)s easier for workers to tap into for emergencies, according to Prudential. Twenty-eight percent said they want to create an easier process for taking out hardship withdrawals, and 31% said they are likely to expand the criteria for hardship withdrawals to include disaster relief, that survey found.