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Employer Tips for Reversing the Early 401(k) Withdrawal Trend

November 29 2023

As a leader in your company, you undoubtedly wear many hats. On any given day, it could be “Small Business Owner,” “Purchasing Manager,” “Project Manager,” “Inventory Control Clerk,” ”HR Director,” “Chief Motivational Officer,” “Business Plan Accountability Coordinator,” “Cybersecurity Analyst”…and, of course, “Retirement Plan Sponsor” (especially during benefit enrollment periods, plan reviews, submitting Form 5500 and plan testing season).

One hat you probably didn’t anticipate wearing was that of a plumber. But if your employees are following recent trends and taking early withdrawals from their retirement accounts at increasing rates, you may need to help fix the leak. 

Tracking the Trend 

The percentage of plan participants taking an early withdrawal from a retirement plan has increased over the past five years. Understandably, many participants sought penalty-free distributions allowed under the CARES Act during 2020. Since then, however, in-service distributions, plan loans, and hardship withdrawals are all on the rise. According to new research from Fidelity: 

  • More than three times as many participants took a hardship withdrawal in 2023 than did in 2018.
  • Hardship withdrawals have increased to 6.9% in 2023, up from 2.1% in 2018
  • In-service distributions have increased to 10.2% in 2023, up from 9.2.% in 2018
  • Plan loans have increased to 5.7% in 2023, up from 4.4% in 2020—a five-year low—although slightly down from 6.5% in 2018.

Peer Review

To help fix the leak, a few large plan sponsors have recently launched an emergency savings program for their employees. Consider using these as inspiration for any potential plumbing project you may need to undertake on behalf of your own employees:

Starbucks recently launched “My Starbucks Savings,” a program designed to help employees save for the unexpected. Employees can contribute a portion of  after-tax pay from their paycheck to an individual savings account. Starbucks incentivizes employees to participate by contributing $25 and $50 credits at savings milestones, up to a total of $250 per incentive-eligible partner.

Delta Airlines recently enhanced a program launched last January, reducing the requirement that enrolled workers must meet to earn up to $1,000 to seed an emergency savings account. Employees have to complete a base level of education, plus one initial coaching session from a financial professional, to earn the full amount. More than 45,000 workers have enrolled in the emergency savings program since it launched, and many have also increased their 401(k) contributions.

Plan Sponsor Considerations

Fidelity’s research showed an incentive for emergency savings can increase adoption of the accounts by 10 to 20 times. In addition, allowing funding of the accounts through payroll deductions can double funding. Fidelity also suggests several factors that can boost employees’ short-term and emergency savings: 

  • Providing easy access to emergency funds quickly.
  • Offering the emergency savings benefit to all employees, not only those eligible for the retirement plan.
  • Ensuring workers can take emergency savings with them if they quit or are terminated.
  • Assuring employees that information about their personal finances is private from the employer.

Optional Solutions to Consider

Beginning in 2024, SECURE 2.0 provides employers with two ways to allow their employees to access funds in case of an emergency. First, employers may offer participants an emergency savings withdrawal of up to $1,000 per year. This withdrawal is not subject to an early withdrawal penalty and may be repaid over three years (although not required). Second, employers may offer non-highly compensated participants an emergency savings account as part of their retirement plan.

Employees may voluntarily contribute or may be automatically enrolled at up to 3% of their annual pay (capped at $2,500). The contributions are made after tax and must be invested in a low-risk product that preserves principal. The employees can withdraw up to the full account balance at least once per month, with the first four withdrawals in the plan year being free. The contributions also count for the purposes of any employer match in the plan, but the matching dollars must be directed to the retirement account within the plan, not the savings account.


Sources/ Notes

Fidelity. (2023). Helping employees save for emergencies.

PlanSponsor. (2022, September). Starbucks Launches New Worker Benefits. Starbucks Launches New Worker Benefits | PLANSPONSOR

PlanSponsor. (2023, August). Delta’s Emergency Savings Program Shows Retirement Security Dividends.

The National Law Review. (2023, November). SECURE 2.0 Series Part 5: A Little More SECURE-ity – Emergency Savings in Your 401(k). Emergency Savings in 401k After Biden Passes Secure 2.0 Act (

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045;

©2023 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. 

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).