Hardship withdrawals are threatening retirement security

The fiscal challenges faced by many American workers due to COVID and inflation have been plentiful, and in some cases, brutal. For those hit the hardest, the drastic step of taking a 401(k) hardship withdrawal can feel like the only option, but employers should stand ready with education and encouragement to remind employees that there are better ways to establish savings for a rainy day. 

According to Vanguard, 401(k) hardship withdrawals — those made because of an immediate and heavy need, and which are subject to income tax as well as applicable early withdrawal fees — are at an all time high. This lump sum removal from the account, which must be approved by the plan provider, can have devastating effects on people’s ability to accumulate savings for retirement and their financial futures overall. Tim Flacke, executive director and co-founder of non-profit financial solutions company Commonwealth, says that employers can play a key role in re-directing their employees to better methods of tackling present financial needs.  

“The first thing is for plan sponsors to reach out to their existing vendors, record keepers and others to find out what they have,” says Flacke. “Often they have resources that are designed to be shared with workers, and if they don’t, there’s nothing more powerful than hearing from their customers, saying this is a need we have.”

Read more: Benefits that help employees fight inflation 

A November report from LendingClub showed that 63% of Americans were living paycheck to paycheck and that even high-income earners are feeling financial pressure. Communication between an organization and its workforce on how to set up and contribute to emergency savings accounts and other available options can be extremely beneficial in helping people make wise decisions with their income. This is something that can go beyond HR, Flacke points out, and should be done at the time of onboarding, as well as intermittently afterwards. Done well, it can help to establish good relationships between managers and employees. 

“There are a lot of employers who don’t have HR departments, but everybody pays their workers,” Flacke says. “Most vendors provide the ability to send that net pay to multiple destinations, so drag your workers’ attention to that at the moment of onboarding. Just slowing down right then to say, ‘Hey, you can have $10 of every paycheck go into a savings account, and we can do that for you.'”

Read more: Are we headed toward a recession? What employers should know about the recent interest rate hike

Especially in trying times, it is important for employers to keep in mind that when it comes to financial education, even small amounts and non-overt approaches can go a long way for the well-being of employees

“To say to workers, ‘We know you’re working hard to make ends meet,’ — to put that on the table, now there is a chance that you’re allies in trying to address the problem,” Flacke says. “It is an area of shared interest because workers obviously want to have less financial stress and more stable lives and employers want them to also, not just for the benefit of the workers themselves, but because evidence is pretty clear they’re more likely to be productive.”

Emergency savings accounts and other options for immediate financial needs are a great way for workers to feel reassured that if things come up short one month, they have the autonomy to pull from their own reserves and then replenish when they’re able. 

“You set up a long-term savings plan that’s designed for financial security a decade or two or three or four down the line,” says Flacke. “You don’t want to be using it to resolve today’s issues. It comes back to the idea of what you can offer your workers as a much more suited tool to manage the short-term, which is really where most of us live. We sometimes call that flywheel savings — they’re constantly building up balances and drawing down instead of some kind of high-cost borrowing.”

Read more: How can employees save more money for retirement? It starts with financial literacy

It is worth recognizing that employers are not always going to feel it’s their place or feel knowledgeable about some of the resources that are available beyond the workplace, Flacke says. Here, early engagement methods such as auto-enrollment in plans and direct deposit in savings accounts can ensure that employees are set up for short and long-term financial success. 

A great way to compound financial information is for employers to stay abreast of current legislation and remind employees of their options when extra funds are made available. Flacke points to the Child Tax Credit and aspects of the Secure 2.0 Act as ways to direct workers to publicly available resources that can provide additional income and set them up to take advantage of employer benefits. Regardless of the level an employer chooses to get involved with their employees’ financial education, equipping their workforce with the tools to save money is something all companies can do.   

“It’s straightforward intuition that folks who are experiencing more financial pain or anxiety recognize that it would be nice to have a little bit of cushion,” Flacke says. “Savings is the optimal tool to manage volatility — it’s most cost effective, it’s fastest, it’s most flexible, it’s more dignified, because you’re not having to rely on anybody else.”