The CARES Act “Run on the Bank” That Wasn’t

Remember back in March when retirement plan recordkeepers were panicking about the COVID-19 pandemic and the related stock market plunge, allegedly fielding record volumes of calls from frantic participants who not only wanted to flee equity investments, but also wanted to take out their money entirely? In response, the industry lobbied Congress to loosen the access requirements to retirement funds.

On March 27, this lobbying resulted in CARES Act provisions that greatly relaxed the requirements for loans, which some large recordkeepers then attempted to strong-arm plan sponsors into accepting. Plan sponsors were given very short windows to adopt the CARES Act provisions, which were automatically put in place if plan sponsors did not respond by the recordkeeper deadline. While there were a number of legitimate reasons why plan sponsors might elect not to adopt some, or all, of the CARES Act provisions, many plan sponsors did implement the distribution features (though a number did balk at the questionable loan provision).

However, a funny thing happened during the anticipated “run on the bank.” The wave of distributions never materialized! Perhaps some of those participants who were allegedly burning up the phone lines just wanted a friendly voice to talk to, since, thus far, few have acted. In fact, loan volume at Vanguard actually went DOWN in April, and less than 1% of participants initiated a CARES Act coronavirus-related distribution that month! The data from other recordkeepers told a similar tale: from late March through May 8, only 1.5% of Fidelity participants accessed their funds, and at Empower, the figure was only 1% through May 31. And these numbers are in spite of the fact that the CARES Act made it easier and less expensive (from a tax perspective) to take a distribution.

Why was this? Maybe participants heeded the warnings about taking these distributions. Or perhaps, by the time they were ready to take a distribution, after various CARES Act stimulus programs kicked in, their financial situations sufficiently improved and they no longer needed the money. Or maybe people were simply not paying attention to the new liberal rules, having more pressing things on their mind during the pandemic. Whatever the reason, many plans sponsors were forced by recordkeepers to undertake an administratively tense process, that, so far, appears to be for naught.

The lesson here for plan sponsors? If a recordkeeper attempts to pressure you to take action, especially in regards to something as important as plan provision changes, be sure to take a step back and carefully evaluate. After all, YOU are the plan fiduciary, not the recordkeeper!

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Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.

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