Troubling 401(k) trend: Raiding retirement savings with hardship withdrawals

Account balances for retirement savings plans decreased in the third quarter of 2023, and withdrawals and loans from those accounts went up slightly, according to new data from Fidelity Investments. The Q3 2023 Retirement Trends analysis looked at average balances for 401(k), 403(b), and IRA accounts. It found that although account balances were down from the previous quarter, they were up double digits from one year ago. That news, and the increase in withdrawals and loans may be due to concerns about inflation and market volatility, the report said—and noted that other data is more positive. “Encouragingly, retirement savings behaviors remain strong, and many employers are coming together to find ways to tackle the problem of unexpected expenses, which can derail budgets, short-term financial goals, and even saving for retirement,” the company said in a statement released with the analysis. “Americans have become accustomed to riding the economic waves of the past several years, and this quarter is no different,” said Kevin Barry, president of Workplace Investing at Fidelity Investments. “They are learning how to stay afloat in very challenging financial conditions – including having enough money set aside should an emergency arise. Through it all, we are pleased to see retirement savers continue to stay the course with steady savings rates and continued commitment to their futures.”

An increase in withdrawals and loans

The study said the recent trend in individuals drawing from their retirement savings though withdrawals or loans is a potential cloud on the horizon. It noted that many leading employers are working to provide workers with an alternative to these practices. Overall, 2.3% of workers took hardship withdrawal in Q3, up from 1.8% in Q3 2022.  The top two reasons behind this uptick were avoiding foreclosure/eviction and medical expenses. In addition, 2.8% of participants took a loan from their 401(k) in 3Q, which is flat from Q2 and up from 2.4% in Q3 2022. “The percentage of workers with a loan outstanding has increased slightly to 17.6%, up from 17.2% last quarter and 16.8% in Q3 2022,” the analysis said. Another option, in-service withdrawals, also saw an increase, up 3.2% in Q3, in increase over 2.7% one year ago. Michael Shamrell, VP of Thought Leadership for Fidelity’s Workplace Investing, said that many employers are implementing workplace emergency savings programs to their financial wellness offerings in order to provide employees with another option to help with short-term financial stress. “Many employers are recognizing the financial pressures their employees are under and are stepping in to help tackle the problem of unexpected expenses, which can derail budgets, short-term financial goals, and even saving for retirement,” he said. “Through benefits focused on financial wellness – such as emergency savings – employees are able to build up a savings cushion using tools provided by their employer, thereby freeing up money for employees to contribute to their retirement savings and future financial security.”

An increasingly popular option: workplace managed accounts

Another new approach that employees seem interested in is workplace managed accounts, the study found. Those accounts provide personalized, professional help for employees who are seeking a more proactive approach. The Fidelity analysis found a 60% increase in the percentage of plans offering those accounts in the past five years. “With the market volatility of the last few years, many investors are looking for more hands-on, customized guidance to help keep their investment strategy aligned with their retirement goals,” Shamrell said. “Our data shows that 93% of those enrolled in our managed account solution are actively engaged in their retirement planning, so it’s really proven to be a positive experience for those who choose to take this route.” The report also looked at IRA accounts, with an increasing number of investors using that vehicle. “The total number of IRA accounts rose to 14.6 million, an 11% leap over this time last year (Q3 2022),” the report said. “Total assets also increased 19% in the last year. Gen Z investors continue to make huge strides with retirement savings, with a 63% increase in IRA accounts year-over-year and overall dollar contributions increasing 51%.”