Despite the fact that tens of millions of Americans have lost their jobs due to the COVID-19 pandemic enveloping the country, the number of retirement savers working for smaller businesses who have cut back on their plan contributions is remarkably low -- or so says a new report by retirement plan administrator Ascensus.
Between January and June, 93.1% of savers using its retirement plans didn't make any changes to their contribution rates, according to the Ascensus report. In fact, only 1.3% of those savers stopped their retirement savings deferrals, and just 1.9% reduced their savings rate. Another 2% of participants stopped contributing because they were furloughed or laid off.
Here's some more positive news: 3.7% of savers actually increased their retirement plan contribution rates. So is it possible that the COVID-19 pandemic won't end up wreaking quite as much havoc on Americans' retirement plans as expected?
Staying on track for retirement
Although the above information is encouraging, a few things need to be called out. First, this data is based only on retirement plans for companies of 500 or fewer employees within the Ascensus platform; it won't necessarily hold true for all retirement plans or employers. Secondly, the impact of COVID-19 on Americans' retirement could extend well beyond their IRA or 401(k) contributions.
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With unemployment still at extremely high levels, there are a whole lot of Americans out of work right now, and those among them who are older risk being forced into early retirement -- a scenario that could have dire long-term consequences for their finances. Meanwhile, jobless Americans who aren't close to retirement age may have been racking up heavy debts as they attempt to keep up with their bills -- even with the now-lapsed enhanced unemployment benefits they were receiving.
Once they're employed again and ready to start chipping away at those balances, getting out from under those debts will no doubt limit their ability to route money into their retirement savings.
As such, it's too soon to sound the "good news" bell on the retirement front. But it is encouraging to see that at least based on the data compiled by Ascensus, the majority of people who were saving before and who are still employed haven't let the pandemic deter them from socking money away for the future.
In fact, when we dig deeper, it's pretty easy to see why those who have kept their jobs have been able to keep contributing steadily to retirement plans. Many workers' regular expenses are lower now that they aren't commuting, buying lunch and coffee beverages daily, or dealing with many of the other incidentals inherent to working outside the home.
Moreover, given the steep drop-off in travel due to the pandemic, it stands to reason that some people may be shifting funds from canceled vacations into their IRAs or 401(k)s instead. (Perhaps that has something to do with the 3.7% of people who have increased their savings rate.)
Of course, the pattern that Ascensus saw during the first three and a half months of the pandemic may not prevail for the rest of the year and beyond. Since June, a majority of U.S. states have experienced major surges in COVID-19 cases; many state and municipal governments have been responding with renewed restrictions. If the situation worsens further, unemployment numbers, which had begun to dip, could climb again. Also, those who remain employed may grow increasingly nervous about their job security, which could cause them to cut long-term retirement plan contributions in favor of bolstering their short-term emergency funds.
One final worrisome point to consider: The Paycheck Protection Program loans that have helped many small businesses stay afloat thus far -- businesses of the size specifically considered by the Ascensus report -- provided a maximum of two and a half months of payroll costs. There's no certainty about what will happen when those funds run out, and for many small businesses, the clock is ticking.
But for now, let's take the above information for what it is: an indication that at least some Americans are managing to stay on track for retirement despite the many obstacles that have been thrown their way during this challenging year.
