An Alarming Shift in Retirement Planning – and a Creative Solution
Published on by Jessica Doremus in Benefit Plan Audits
There’s a significant – and alarming – shift in how Americans view their retirement savings: the $12.2 trillion currently invested in these plans is increasingly viewed as accessible emergency funding instead of money strictly earmarked for retirement.
Record-breaking withdrawals
The numbers tell a stark story. Last year, a record 4.8% of workers took hardship distributions from their 401(k) plans for financial emergencies—more than double the pre-pandemic average of 2%. Even more concerning, nearly one-third of people who leave their jobs annually choose to liquidate their entire 401(k) accounts, accepting both taxes and penalties rather than preserving the money for retirement.
The hourly worker challenge
Research reveals a striking disparity between worker types. Among hourly workers earning $50,000 to $75,000, 42% cash out their 401(k) savings after leaving an employer, compared to only 28% of salaried employees at comparable income levels.
The reason lies in income volatility. Hourly workers typically experience monthly income swings of about 15%, making it difficult to handle unexpected expenses when pay dips. Many rely on debt to bridge financial gaps and then cash out their 401(k)s when changing jobs to pay off that debt.
Legislative changes are making access easier
Recent legislative changes have expanded withdrawal options. A 2022 law allows 401(k) savers to withdraw up to $1,000 penalty-free for emergencies once every three years. About 30% of Fidelity’s 23,000 administered 401(k) plans now offer this feature, with more than 300,000 account holders taking advantage since its launch.
The high cost of early access
While early access may solve immediate financial pressures, it comes at a steep long-term cost. Economists at Boston College’s Center for Retirement Research estimate that early withdrawals could reduce available retirement wealth by about 30% when lost savings are compounded over 30 years.
Emergency funds may offer a solution
Recognizing the problem, many companies are implementing emergency savings programs alongside their 401(k) plans. Major employers like Starbucks and Delta Air Lines now allow workers to divert portions of their paychecks into separate emergency funds.
And research shows this approach works. Vanguard found that workers with $2,000 or more in emergency savings are significantly less likely to cash out their 401(k)s or take hardship withdrawals.
The challenge facing policymakers and employers is striking the right balance: providing emergency access while protecting core retirement savings to ensure Americans can weather today’s storms without sacrificing tomorrow’s financial stability. We encourage you to consider the current withdrawal landscape when administering your plan.
Additional resources
You may also be interested in our employee benefit plan audit video series, available on-demand, or the most recent 401(k) plan management benchmarking report. We also offer a series of compensation and benefits studies – useful tools for benchmarking your organization against others in our region.
If you have questions or need assistance regarding employee benefit plans, Barnes Dennig has the answers. For additional information, contact us. As always, we’re here to help.
