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Reeling from Financial Hardships, Employees Dip into Retirement Accounts


A hand hammering into a pink piggy bank.


​A concerning number of employees are tapping into their retirement accounts as they face financial headwinds, new research suggests, while overall retirement security continues to falter.

Over one-third of workers (37 percent) have taken a loan, early withdrawal and/or hardship withdrawal from their 401(k) or similar plan or IRA, according to a new report by Transamerica Center for Retirement Studies, a not-for-profit division of Transamerica Institute focused on retirement education.

The survey of 5,725 U.S workers found that Generation Z workers were the most likely to dip into their long-term savings (28 percent), followed by Millennials (24 percent), Generation X (19 percent) and Baby Boomers (12 percent).

The problem stems from the fact that a majority of workers lack emergency savings, said Catherine Collinson, CEO and president of Transamerica Institute and Transamerica Center for Retirement Studies, with many taking withdrawals from their retirement accounts to cover unexpected financial shocks.

"By doing so, they are potentially paying income taxes and a 10-percent penalty on the amount withdrawn, which is counterproductive to their goals," she said. "Moreover, dipping into their savings could severely impact the long-term growth of their retirement nest egg. Down the road, they will need those savings when they retire."

A financial emergency was the most frequently cited reason for taking out a retirement loan (31 percent), followed by paying off credit card debt (29 percent), according to the survey. Other reasons include everyday expenses (26 percent), medical bills (25 percent), home improvements (23 percent), the purchase of a vehicle (19 percent) and unplanned major expenses (19 percent).

Among those who have taken a hardship withdrawal from a 401(k) or similar plan, the reasons for doing so included medical expenses (17 percent), payments to prevent eviction (16 percent), expenses and losses incurred due to a disaster in a federally declared disaster area (15 percent), payment of tuition and related educational fees (14 percent), costs related to buying a home (13 percent), expenses for qualified repairs to damage of a principal residence (12 percent), and burial or funeral expenses (6 percent).

Faltering Retirement Confidence

Overall, the Transamerica survey found that employees' retirement confidence has taken a hit, with 41 percent of respondents saying they think younger workers will struggle more than those currently in retirement.

The situation has grown more dire in the past few years, Collinson explained.

Even before the onset of the COVID-19 pandemic, "many workers were inadequately saving, and they were at risk of not achieving a financially secure retirement," she said. "Then the pandemic brought widespread layoffs and financial setbacks, which exacerbated the situation."

At the same time, she said, "Social Security is under severe strain and reforms are imminent, but it is unclear how they might take shape and how benefits may be impacted. Looking toward the future, it is likely that workers will be expected to self-fund an even greater portion of their retirement income, thereby making long-term financial security even more difficult to achieve."

The survey results are concerning, but they aren't necessarily surprising: Scores of studies have found that employees' financial health is reeling due to the pandemic, months of high inflation, market volatility and other economic uncertainties.

The majority of employees say they are experiencing financial stress, according to a report earlier this year from financial wellness firms Salary Finance and FinFit, while recent statistics from NerdWallet find that fewer than half of Americans (45 percent) would be able to cover a $1,000 emergency expense without turning to a credit card or loan.

It's no surprise all that financial hardship is taking a toll on retirement.

Data out in April from the Employee Benefit Research Institute (EBRI) and research firm Greenwald Research found that both workers' and retirees' confidence in having enough money to live comfortably throughout retirement significantly dropped from 2022's numbers, falling to 64 percent from 73 percent among workers and to 73 percent from 77 percent among retirees.

"The last time a decline in confidence of this magnitude occurred was in 2008, during the global financial crisis," said Craig Copeland, director of wealth benefits research at EBRI. "This shows that the current economic climate—in particular, inflation—is eroding the confidence that Americans had in their retirement preparations going into the pandemic."

Employer Help

The dire findings underscore the importance of employer assistance when it comes to helping employees become more financially secure, industry experts say.

"By offering retirement benefits, financial wellness programs, health insurance and an array of insurance benefits, [HR and benefits managers] can help their employees save and invest for the future, make informed financial decisions and protect their savings," Collinson said.

Employees are increasingly looking for that help: A May report from Morgan Stanley at Work found that roughly 69 percent of employees said they are paying more attention to reviewing their financial benefits in 2023, up 9 percentage points from last year, while recent PwC research noted that financial counseling, particularly financial education, is a desired perk among employees.

One specific area of opportunity for HR and benefits managers is facilitating emergency savings, Collinson said. "Beginning in 2024, the recently enacted SECURE 2.0 creates an emergency savings account as a new plan feature for defined contribution retirement plans, including 401(k) plans, to help mitigate the need for workers to dip into their retirement savings," she explained.

Emergency savings funds are growing in popularity, but they are still a fairly rare benefits offering: Just 2 percent of employers said they offer such a program, according to SHRM's 2023 Employee Benefits Survey.

Amazon just announced it is implementing an emergency savings fund to help employees save for a rainy day directly from their paycheck. Employees can set aside a portion of their paycheck automatically each pay period and access the funds when they are most needed.

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