Why using a 401(k) to pay for emergencies is hurting employers and employees
More and more employees are withdrawing $1,000 or less from their 401(k) retirement accounts to help pay for emergency expenses according to HR leaders. This trend is causing corporate leaders to become concerned about the financial stress that their employees are living with. Read the following blog post to learn more.
More than ever, HR leaders at Fortune 500 companies are reporting that employees are withdrawing $1,000 or less from their hard-earned 401(k) retirement accounts to pay for emergency expenses. These employees — often living at the brink of being financially unstable — are using the funds for unexpected emergency expenses like car repairs, medical bills or even to purchase books for their college-age children.
Corporate leaders are now, more than ever, concerned that many of their employees live under a high degree of financial stress that can affect their productivity, creativity and even their health, resulting in absenteeism and drops in productivity that ultimately impact the bottom line. HR managers are especially feeling the pain as they are called upon to handle the excessive paperwork needed for the 401(k) plan withdrawals, causing extra work that could be spent more productively on other projects that benefit all employees.
The fact that more Americans than ever are dipping into their 401(k) accounts for emergency funds reveals that many are living above their means or working below their needs financially. While it’s important to have an emergency fund, for many people savings is a luxury they simply can’t afford. According to a Federal Reserve survey, nearly 40 percent of Americans said they don’t have enough cash on hand to cover an unexpected $400 expense. The quick fix for many is to use credit cards or ask family or friends for a loan when an emergency arises, but when those are not options, tapping into the 401(k) accounts is becoming increasingly common.
Some companies are partnering with payday loan companies so employees will refrain from tapping into their retirement funds. This is actually a worse idea because they’re setting their employees up to fail by enabling a vicious cycle of debt employees may never be free of.
Financial education could be the key to helping employees gain control of their financial lives. Companies that promote financial literacy courses and attendance at financial seminars or conferences offer the first step toward a better path for future financial stability. Offering or subsidizing the cost of continuing education courses help inspire employees to begin a lifelong journey of education for higher salaries and career advancement. Companies that promote education and career advancement attract, engage and retain employees longer than companies that don’t.
Flexible benefits can help
Companies can help their employees refrain from using their 401(k) retirement accounts as a bank if they offer flexible benefits. Employees get to choose how to use their earned benefits, like utilizing the monetary value of their unused paid time off (PTO) for other priorities such as paying for an emergency expense, paying down student loan debt or funding a vacation, among other things. Companies that offer flexible benefits are giving workers the ability to finally be in the driver’s seat of their careers and lives. When companies empower employees in this way, job satisfaction, productivity and creativity go way up.
Flexible benefits are a no brainer to organizations that want to attract, recruit, engage and retain top talent. Salary isn’t the only factor in determining a good career move, and companies that want to win the talent war will offer some type of flexible benefits. Every employee should have the ability to choose benefits based on their individual needs, avoiding the damaging financial practice of using 401(k) accounts for emergency expenses.
SOURCE: Whalen, R. (25 November 2019) "Why using a 401(k) to pay for emergencies is hurting employers and employees" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/employees-are-using-401k-funds-for-emergencies
What to do when your state says you need a retirement plan
Did you know: Almost 25 percent of U.S. adults lack any retirement savings. In response to these findings, many states are beginning to require employees to participate in state-sponsored retirement programs. Read the following blog post to learn what to do when your state requires you to participate in a state-sponsored retirement plan.
We’re all too aware of the looming retirement crisis. Almost 25% of adults in the United States lack any retirement savings, according to the Federal Reserve. In response, a number of states have decided to enact legislation that require employees to participate in their state-sponsored retirement program.
What does this mean for business owners not currently offering a plan?
For businesses operating in a state where legislation has been proposed, it’s very likely that they will have to make some changes in the not-so-distant future. Some state plans come with penalties for not enrolling, while others offer appealing incentives for involvement. However, the real question may not be whether you want to offer a state-sponsored plan, but rather, whether a state-sponsored plan is the right option.
Most state-sponsored plans are designated as Roth IRAs, using investments chosen by the state, and are low-cost. However, there are also benefits to creating a customized plan that works for you and your employees. Issuing your own plan allows you to:
- Select your own investments to include the right fund variety and offer user-friendly models like target-date funds;
- Create your own plan design so you have more control over things like company matching and eligibility rules;
- Derive significantly greater tax benefits because a 401(k) plan allows deductions of pre-tax earnings of up to $19,000 whereas an IRA only permits deductions of up to $6,000 in earnings;
- Borrow against your plan in times of emergency; and
- Keep costs equally low thanks to new entrants and advanced technology that eliminates overhead.
- While state-sponsored plans are getting the conversation started, it’s important to look at the bigger picture strategy and determine the best short- and long-term decisions.
To better understand the urgency behind any retirement plan decision, it’s worth digging deeper into the specific requirements of your state. But regardless of what state you’re in, there are many perks to offering a company-sponsored retirement plan such as tax incentives, recruitment and retention benefits, and investing in your employee’s future. And thanks to new entrants and advanced technology, many traditional inefficiencies and excess fees have been eliminated, keeping costs down.
States are putting emphasis on the retirement crisis and stepping in to help. But at the end of the day, this is about setting your employees — and yourself — up for retirement security. Look at the current proposals in your jurisdiction, think about what you’re trying to accomplish, and determine what will offer the greatest value for you and your team. Everyone deserves retirement security.
SOURCE: Brecher, A. (22 November 2019) "What to do when your state says you need a retirement plan" (Web Blog Post). Retrieved from https://www.benefitnews.com/opinion/what-to-do-when-your-state-says-you-need-a-retirement-plan