This is the fourth installment from Commonwealth’s “Saving Through a Crisis” series (read part 1,  part 2, and part 3), which shares their latest research, in partnership with the Defined Contribution Institutional Investment Association’s Retirement Research Center, on how low- to moderate-income plan participants are handling their retirement savings during the pandemic.

With the number of vaccinated Americans steadily increasing, the number of new COVID-19 cases steadily going down, and the American Rescue Plan providing much-need economic relief, Americans wanting signs of hope after a long year have a number of places to look. However, when it comes to measuring the financial security of Americans one year later, both lower-income Americans and people of color have not recovered their losses.

The unemployment rate reported by the Bureau of Labor Statistics is still well above what it was in February 2020. Moreover, the ongoing economic hardship has disproportionately fallen on certain groups, specifically women and Black, Hispanic, Asian, and low- and moderate-income adults. Although some Americans have recovered from pandemic-related financial hardship or gone through the pandemic without any, many others are still trying to find new work or remain at a reduced income level.

In partnership with the Defined Contribution Institutional Investment Association’s (DCIIA’s) Retirement Research Center, we’ve conducted a series of surveys asking LMI plan participants how they are handling their finances and retirement savings during COVID-19.

In our most recent survey, Commonwealth wanted to understand this income loss among low- to moderate-income (LMI) plan participants ($20-75,000 annual household income), and how they continue to manage the pandemic’s impact to their financial security. The data indicate two distinct experiences:  those who have struggled with sustained decreases in income and those who have not. One-third of respondents to this survey had lower income in late January or early February of 2021 than they had the year prior.

This survey uncovers important findings about the experience of those who have suffered sustained income loss, whose stories may be buried by national averages about increased savings and decreased unemployment rates.

Lower-income and non-white respondents are more likely to have lost income during the pandemic: 

Respondents with lower income before the pandemic (as measured by annual household income in 2019) were more likely to have had their income decrease, with 41% of respondents making $20-30k having lost income during the pandemic vs. 31% of respondents making over $30k. Non-white respondents, who are also more likely to have had lower income coming into the pandemic, were more likely to have had their income decrease, with 41% of non-white respondents having lower income vs. 29% of white respondents. The two groups (those who have lost income and those who have not) are roughly the same age on average (46 years old).

Those who have lost income are:

Twice as likely to have tapped their retirement savings: Respondents who have lost income during the pandemic are more than twice as likely to have taken or plan to take a “negative retirement action” (35% vs. 14% of respondents who have not lost income during the pandemic; includes reducing contribution rate, pausing or stopping contributions, taking a loan from the account, and/or taking a withdrawal from their retirement account).

• More likely to struggle with debt: Respondents who lost income are three times as likely to have had their debt increase since February 1, 2020 (48% vs. 16% of people who have not lost income during the pandemic), and in particular are much more likely to have had their credit card debt increase (41% vs. 12% of people who have not lost income during the pandemic). Those who have lost income are also more likely to depend on their tax refund to pay down debt: among those who have a plan for at least part of their refund, respondents who have lost income are more likely to plan to spend their refund on paying down debt (56% vs. 40% who have not lost income)
• More likely to have turned to their emergency savings: Respondents who lost income during the pandemic are more likely to have withdrawn from their emergency savings during the pandemic (66%) than those who did not lose income during the pandemic (40%). This finding has been borne out by other research: the Financial Health Network’s January Financial Health Pulse survey found that respondents who reported a job loss because of the COVID-19 crisis were 2.6 times more likely to say they had spent down their savings.
• Taking other financial actions to cope: As the chart depicts, those who have lost income are more likely to have decreased their expenses, borrowed from friends or family, and sold any possessions in response to COVID-19 and current economic conditions. These findings, as well as the increase in credit card debt, are also supported by Commonwealth’s Financial Resilience Project, which tracks the financial lives of American LMI households during COVID-19.

Recommendations for getting plan participants to rebuild emergency savings 

Both plan sponsors and record keepers can support plan participants in recovering financially from the pandemic.

Because LMI plan participants with lost income have had to turn to their emergency savings and retirement account for liquidity, even if their income returns to pre-pandemic levels, they will still suffer from a reduced financial cushion and weakened retirement preparedness. Plan participants will need sufficient emergency savings to make retirement contributions and prevent future need to tap their retirement accounts. Record keepers will need to start with helping to rebuild emergency savings in order to get these plan participants back on track for retirement as the economy recovers.

Record keepers and plan sponsors can help these plan participants move in the right direction by:

• Providing employee hardship funds
• Connecting employees with guidance on repaying debt
• Encouraging intermittent saving where their budget allows, and 
• Setting up emergency savings products through their platforms so that participants can begin saving for emergencies when they are able to do so.

Record keepers are increasingly offering these kinds of emergency savings products; to ensure they support plan participants in successfully building emergency savings, these accounts should be automated, accessible, engaging, and low-to-no fee. Rebuilding small-dollar savings is a critical step in enabling employees to eventually increase their 401(k) contributions and make up for time lost during the pandemic. Record keepers and plan sponsors looking to regain a new normal after the pandemic, for both themselves and their employees, would benefit from playing an active role in supporting emergency savings.

We will continue to track LMI plan participants’ actions with one final survey in the coming months. If you are a plan sponsor or record keeper interested in offering emergency savings and would like to learn more about how you can support your plan participants, contact Nick Maynard at info@buildcommonwealth.org.

BlackRock’s Emergency Savings Initiative

BlackRock announced a $50 million philanthropic commitment to help millions of people living on low to moderate incomes gain access to and increase usage of proven savings strategies and tools – ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis.