As the Cost of Living Rises, 401(k) Hardship Withdrawals Increase

According to a recent survey, more Consumers used their 401(k) assets to pay for monetary crises in 2022.

According to Vanguard’s How America Saves 2023 study, over 3% of employees took hardship withdrawals from their defined contribution plans in 2022, up from 2.1% in 2021.

According to the research, plan loans, which let members borrow money from their retirement savings accounts, also rose by 9% in 2022 compared to 2021 but were still below pre-pandemic levels.

People with 401(k) plans can access their defined contribution plan assets before retirement by borrowing from their account balance or through a hardship or in-service withdrawal.

“Hardship withdrawals increased moderately, perhaps signaling that some households were facing financial stress,” the report said.  

However, as automatic enrollment increases, a larger percentage of the workforce, including those with lower incomes, are participating in defined contribution plans, Vanguard noted. 

Yet, as automatic enrollment rises, more workers — including those with lower incomes — are taking part in defined contribution plans, according to Vanguard.

A little rise in hardship withdrawals is not altogether unexpected, according to the research. Also, it’s significant to highlight that more than 97% of participants did not withdraw due to hardship during this difficult year.

The research said, “This data highlights that participants are usually resilient and retain a long-term strategy to retirement savings, even during challenging economic times.

If you are preparing for your retirement, you could consider using a personal loan to help you pay off debt at a lower interest rate, saving you money each month. 

Despite Economic Difficulties, People are Still Saving for Their Retirement

The research stated that despite price and interest rate increases, People continued to save for retirement.

The average account balance of retirement plan members decreased by 20% in 2022 as a result of macroeconomic difficulties including inflation, which reached a 40-year high of 9.1% in June. The cost of products and services has increased for Americans, and many are finding it difficult to make ends meet.

Despite the year’s economic difficulties, roughly 40% of respondents indicated they raised their deferral rate, which is consistent with prior years, according to Vanguard. The percentage of an employee’s income that is put toward a defined retirement plan is referred to as the deferral rate.

According to the research, members who maintained a balanced approach grew slightly to 79% from 78% in 2021, while the proportion of participants in professionally managed allocations increased to 66%.

According to Vanguard, the rise in the contribution rate among members notwithstanding the economic downturn can be attributed to an increase in automatic enrollment and the usage of professionally managed allocations.

Even in the face of the adverse economic situation of 2022, plan sponsors continued to apply automated solutions and use human inertia to affect decision-making, according to Vanguard.

How Plan Sponsors May Assist Staff Members’ Financial Security

The increased usage of automatic enrollment has enhanced Americans’ financial security. Vanguard asserts that other actions may be made to strengthen this development even more.

For instance, Vanguard advised that participants in automatic enrollment programs should work at a 15% overall savings rate. Also, plan sponsors should assist participants in achieving other financial objectives, such as clearing school debt and increasing emergency and health savings.

As stated by Vanguard, “Plan sponsors can support their employees by providing cost-effective, high-quality advice as well as a platform that offers guidance on their financial well-being — two valuable services that meet participants where they are on their financial journey and help provide customized solutions for their goals.