Could your participants benefit from emergency withdrawals?

Striking the right balance between retirement and emergency savings can be difficult, especially for younger and lower-income workers. Many employees don’t have enough liquid funds to cover even modest emergency spending needs. National surveys show that 37% of adults don’t have enough cash on hand to pay a $400 emergency expense.¹ When faced with spending spikes they can’t fund, many resort to expensive credit card debt.²

The SECURE 2.0 Act was signed into law as part of the Consolidated Appropriations Act, 2023. One of its optional provisions enables participants to access their retirement accounts for emergencies.

Effective January 1, 2024, SECURE 2.0 expanded employees’ emergency access to their retirement funds. Plan sponsors may, but aren’t required to, offer an in-service withdrawal provision that allows employees to take one emergency withdrawal per year of up to $1,000.³

Plan sponsors may also establish pension-linked emergency savings accounts (PLESAs), which allow participants to build short-term savings through Roth payroll deferrals.⁴ Emergency withdrawals are easier to implement than PLESAs, so employers may be more likely to offer them in the near term.⁵

When determining whether to allow emergency withdrawals, plan sponsors must first decide whether to give employees access to their retirement savings for nonretirement reasons. The plan’s experience with loans and other types of nonretirement withdrawals might offer guidance.

For plans that offer loans, the number issued for less than $1,000 may indicate employee need for emergency funds. Plan sponsors may also want to review hardship and other in-service withdrawal rates. In 2023, among participants allowed to take those types of withdrawals, 3.6% took a hardship withdrawal and 4.0% took a nonhardship withdrawal.⁶ Emergency withdrawals could reduce the number of small loans and in-service withdrawals.

As alternatives, plan sponsors should consider whether to offer employee assistance programs (EAPs) and disability benefits that give participants access to funds in case of an emergency.

Emergency withdrawals from 401(k) or 403(b) plans can provide liquidity in times of financial stress, but they may also raise the risk of costly leakage from retirement savings. Annual withdrawals of $1,000—and the compounded market returns they forgo—could substantially slow participants’ retirement wealth accumulation.

Plan sponsors can help minimize leakage by encouraging participants to repay emergency withdrawals by increasing their contribution rates. Repayment nudges, including communications to participants who have requested withdrawals, could help participants to repay the withdrawn funds promptly, essentially treating the withdrawal as a loan. Our research shows that most participants would be able to repay the withdrawal amount over a reasonable time while maintaining their contribution rate.