Prior to the COVID-19 pandemic, retirement preparedness and financial health were common concerns for U.S. workers. Now, a recession has forced many to dig into their long-term savings for short-term needs.

Federal lawmakers recognized that need when enacting the Coronavirus Aid, Relief, and Economic Security Act. The law enhanced the ability of consumers to make special distributions for certain eligible retirement plans — including defined contribution plans like 401(k) plans.

Employers largely responded to the CARES Act's signing in March by enabling employees to access retirement plan assets. A May survey by Willis Towers Watson found 65% of employer respondents planned to increase employees' ability to do so. By September, those rates rose, according to Mark Smrecek, senior director, retirement, and financial well-being market leader at Willis Towers Watson. Smrecek said that "we're seeing upwards of probably 4 out of 5 employers providing additional access" to COVID-19-related distributions.

It's likely that many needed that access. Americans, particularly those who are low-income, continue to face financial hardship during the pandemic. April data from Pew Research Center showed that 48% of middle-income adults and only 23% of lower-income adults had "rainy day funds" that could cover their expenses for three months in case of an emergency.

The 401(k)'s short-term outlook

"Once early March and April hit, we knew employees were being directly disrupted," Smrecek said, with short-term cash needs heightened particularly for workers dealing with changes to either their own employment situation or that of a family member.

But even some of those who did not necessarily need the money in the short-term made withdrawals to build emergency savings, he noted.

Year-over-year, HR services company ADP actually saw a decline in the number of 401(k) loans, said Kristin Andreski, senior vice president and head of the company's retirement services business.

But ADP also observed a "significant increase" in the number of withdrawals from these accounts, Andreski said, "clearly the result of the pandemic, clearly the result of the capabilities that the CARES Act put forward." She added that about 60% of the CARES Act-related withdrawals made by ADP clients were for the maximum amount allowed by the law.

At the same time, Willis Towers Watson has found that the level of contributions made to defined contribution plans "has not materially changed," Smrecek said; "We're actually seeing additional contributions going into the plan."

In the long-term, a focus on saving behaviors

As companies continue their gradual shift toward reopening, Andreski said that ADP and its clients are mainly focused on getting employees back on track from a retirement planning and financial readiness standpoint.

"The fact that people have had to access their retirement funds says a lot in terms of what their readiness was in terms of emergency savings ahead of this pandemic," Andreski said. "The conversation has shifted … to be a more broader conversation."

There is also speculation that employers might increase their focus on areas like emergency savings within the defined contribution plan context moving forward, according to Smrecek. Such an emphasis could be placed using an array of financial products, like flexible benefit plans or student-loan matches. "All these things play a part in building resilience," Smrecek said.

Employers will also need to continue to emphasize financial benefit offerings that may have been underutilized, particularly those that help workers meet their day-to-day needs, and position them "front and center" for employees, Smrecek said. Remote work can make this process more difficult, he acknowledged, but employers might use tactics like virtual focus groups of employees to aid their understanding of workers' needs.

"A lot of this has to do with education and awareness," Andreski said. "The challenge has always been what I refer to as activation, the just general awareness of getting employees to utilize and engage, and I think that is our biggest opportunity."