This article was updated April 3 to include the types of funds used by state-facilitated retirement programs.
Once the immediate health and wellness concerns of COVID-19 are addressed, we should consider the long-term impact this pandemic and the response to it will have on people’s retirement savings. State efforts to expand programs in this area may be helping participants alleviate some of the volatility they face in both broader financial markets and their personal incomes.
As the coronavirus situation evolves, individuals, states, and nations are dealing with the consequences. Many states have issued stay-at-home orders and closed nonessential businesses. Several territories, counties, and cities have followed suit. All told, more than 150 million Americans have already been affected by these closures, with additional states expected to follow. Although some people are able to work remotely or have jobs that are considered essential, stay-at-home orders mean that many are unable to work or must take time off due to child care needs. All of this portends at least a short-term jump in unemployment, reduced income for individuals, and the possibility of a global recession.
The uncertainty in the market has led to steep declines in the value of many retirement accounts. In the near term, those recently retired or those heading into retirement over the next several months may feel the need to rejoin or postpone leaving the workforce until account balances can recover. However, most of the workforce has longer time horizons; retirement savings is a lifelong endeavor. For those investing in equities, financial advisers generally recommend buying and holding investments for the long term rather than trying to time the market. Despite short-term volatility, financial markets have provided significant rates of return over the long haul. Additionally, those who make regular payroll contributions to their savings account can take solace in the knowledge that they are following the strategy of dollar-cost averaging, which reduces the overall impact of market volatility and can result in higher returns down the road.
While the pandemic-induced downturn is affecting retirement plan investments, retirement programs could provide some short-term security. Interestingly, over the past few years, several of the states with stay-at-home orders have been implementing auto-IRA programs to help their residents build nest eggs. These programs apply to workers at businesses without an existing retirement plan who are automatically enrolled—with the ability to opt out—in a Roth IRA, which is overseen by a third-party investment firm. In California, Illinois, and Oregon—the three states where these programs are currently operating—contributions average about $100 a month. These accounts have several features that may help savers weather market volatility and provide some cushion in the face of economic shocks.
For example, by default, California’s CalSavers and Oregon’s OregonSaves programs deposit the first $1,000 of a participant’s contributions in a money market fund that carries minimal risk and largely insulates those savers from market fluctuations. Subsequent contributions are then funneled to target date funds, which seek to balance risk and return in an age-appropriate manner. Furthermore, these programs give participants who previously lacked a retirement savings option the opportunity to claim the federal Retirement Savings Contributions Credit (Saver’s Credit). Depending on income, the Saver’s Credit allows participants to receive up to 50 percent of their contribution back on their taxes, up to $1,000.
Additionally, these programs can be a source for emergency savings. Auto-IRAs make it easy for participants to withdraw their contributions if they face an income shock. Roth IRAs are funded with after-tax monies, meaning that savers can withdraw their contributions at any time if needed without penalty. Fortunately, for both the program and savers, few, if any, seem to be contacting the program with questions, issues, or withdrawal requests related to market volatility in the early stages of California’s stay-at-home order. Katie Selenski, executive director of CalSavers, said that as of March 18, there had been no calls related to market volatility, but this situation may change in the coming weeks and months if the pandemic and response drag on.
Finally, these programs are administered with relatively low investment fees for participants when compared with other options in the small-employer space. Additionally, employers are not assessed any fees for facilitating the program. Employers simply upload a list of their employees and facilitate payroll contributions. They face no ongoing direct costs and have no administrative filings to contend with to offer the program, so they can focus on managing their business.
COVID-19 and its fallout are affecting all aspects of our lives, and retirement savings is no exception. Although uncertainty is high, state efforts to expand basic financial tools to millions of workers may be helping participants cope with volatility both in the broader financial market and in their personal lives.
John Scott is project director and Andrew Blevins is principal associate with The Pew Charitable Trusts’ retirement savings project.