US Securities and Exchange Commission (SEC) chief Jay Clayton fears that people will raid their 401(k)s and individual retirement accounts (IRAs), under the new federal coronavirus-recession aid program—and mess up their lifetime savings goals by channeling the proceeds into risky investments.
Washington’s $2.2 trillion relief program, known as the CARES [Coronavirus Aid, Relief, and Economic Security] Act, allows people to take out up to $100,000 from their 401(k) or IRA. Then, they are exempt from the 10% penalty for early withdrawal if they are under 59.5.
Those siphoning off the penalty-free money are taxed on it, but the levies can be stretched out over three years. All that plan-tappers need to do is say that COVID-19 has harmed them either in terms of health or personal finances.
Clayton said that, while he backed the intent of the withdrawal provision, he feared the retirement cash will sluice into other investments that surging individual investors favor.
“What I don’t support is people doing something like that,” Clayton told CNBC, “not to bridge a gap or a difficulty, but to maybe change to a different investment strategy that isn’t in their long-term interests.”
Indeed, retail investors have piled into the market. Fidelity Investments, for instance, reports that 1.2 million retail clients opened new brokerage accounts between March and May, a 77% boost from the same period the year before. Many are attracted to riskier plays like beaten-down casino and airline stocks. Trading apps like Robinhood, catering to locked-down young people, are also very popular.
Clayton said he is telling the financial community: “Look, people need to make those withdrawals to get over a difficult time, we should help them with that. But we shouldn’t use that lack of a penalty to put them into investments that aren’t appropriate for them.”
To date, there is no evidence of widespread diverting of retirement money into other investments. Vanguard Investments reports that just 1% of investors have tapped their nest eggs due to the virus. Among those who did make such a withdrawal, a mere 3% removed the full $100,000 allowable maximum.
The SEC head said investing is a great way to build the financial stability that is so critical during bad economic times. But he added that investing beginners should also understand the stock market’s risks.
“Our favorite kind of retail investor is your long-term retail investor who builds their wealth over time through investing,” Clayton said. ”There is risk in being a short-term, market-timing participant, and it does make me nervous.”