When the seriousness of the coronavirus pandemic first became apparent back in the spring, the stock market went into a nosedive with the Dow Jones Industrial Average falling 37% in just one month. But the turnaround since then has been just as remarkable: All three major stock indexes hit record highs in November while the small-cap Russell 2000 Index enjoyed its best month in 40 years.
Newly Minted Millionaires
The soaring stock market has resulted in thousands of newly minted 401(k) and IRA millionaires, according to a report recently released by Fidelity Investments. At the end of the third quarter, the number of Fidelity 401(k) participants with at least $1 million in their account rose by 17% over the previous quarter to 262,000. Meanwhile, the number of IRA millionaires rose by 15% over the previous quarter to 234,000.
The previous record high number of 401(k) and IRA millionaires was at the end of 2019 when there were 233,000 Fidelity 401(k) millionaires and 208,000 IRA millionaires. According to Fidelity, most of the growth (90 percent) in account balances this year has been due to strong market performance rather than increased contributions.
The average Fidelity 401(k) account balance was up 5% at the end of the third quarter over the previous quarter to $109,600, while the average Fidelity IRA balance was up 6% at the end of the third quarter over the previous quarter to $109,600.
There has also been a drastic rise in the number of Thrift Savings Plan (TSP) millionaires this year. The TSP is the 401(k)-like retirement plan for federal government employees. At the end of the third quarter, there were 55,183 TSP millionaires, up from 45,219 TSP millionaires at the end of the previous quarter, according to the Federal Retirement Thrift Investment Board.
Staying the Course
Fidelity Senior Vice President Jeanne Thompson stated that “the people who were able to keep their jobs and keep their hours, for those people, we really did see that they just continued to contribute and continued to take advantage of the company match.”
Of course, there are millions of Americans who haven’t kept their jobs or their hours due to the pandemic. To help these people deal with the financial hardships they may be facing, the Coronavirus Aid, Relief and Economic Security (CARES) Act relaxed a number of rules related to retirement plan loans and distributions.
Specifically, the CARES Act increased the 401(k) loan limit from $50,000 to $100,000 and waived the 10% penalty that normally applies to 401(k) withdrawals made before age 59½ for individuals who are experiencing financial hardship due to the pandemic. Both of these changes apply to this year only.
The good news is that despite some concerns that many employees would raid their retirement accounts due to financial hardships caused by the pandemic, a relatively small percentage of employees have taken advantage of these provisions so far. Between April and October, 1.3 million Fidelity 401(k) account holders had taken a CARES Act distribution from their plan. This represented only about 5.2% of all eligible account holders. The average distribution amount was about $10,000, according to Fidelity.
“There are a fair amount of people who are taking just what they need,” stated Fidelity SVP Thompson. “They are taking that small amount as they need it versus taking a huge lump sum. They are getting what they need just to get by to make ends meet. As we all know, when you take the money out, it can be hard to put it back in.”
The Vanguard Group recently reported similar findings: Only 4.5% of Vanguard 401(k) plan participants have taken a CARES Act hardship withdrawal from their plan this year and less than 1% have taken out a CARES Act loan. The median CARES Act distribution from Vanguard 401(k) plans is about $12,000.
Meanwhile, about 96,000 TSP participants had taken out a CARES Act distribution from their plan through November 12, according to the Federal Retirement Thrift Investment Board.
The Retirement Readiness Gap
While it’s encouraging that relatively few retirement plan participants have had to take hardship distributions from their plans due to the pandemic, those who have could be faced with a retirement readiness gap when they’re ready to retire.
According to Vanguard, the average person who did take out a hardship distribution could close the retirement gap by increasing their retirement plan contributions by one percent next year. This is based on the median amount of Vanguard hardship distributions and the average age of those who took distributions.
Please give us a call if you have more questions about taking CARES Act hardship distributions from your retirement plan.