You’ve Got a Problem When Staff Dip Into 401(k)s

More workers are reaching into retirement savings to cover expenses: “It’s a big red flag.”

The HR department noticed a flurry of retirement-account withdrawals and looked into it. Employees all told the same story: facing a string of unexpected expenses like medical bills, home-insurance hikes and ever-growing grocery bills, they had dipped into their 401(k)s to cover the costs, thinking no one at the company would notice. But people did, from HR to management.

The percentage of American workers dipping into their retirement accounts to cover shortfalls is up by 29% from pre-pandemic levels, according to at least one major 401(k) firm. Should employers care? “It’s a big red flag,” says compensation expert Tom McMullen, senior client partner in the ESG and Inclusive Rewards practice at Korn Ferry. The reason: financially struggling workers consistently exhibit lower job satisfaction and attendance, alongside dropping mental and physical well-being, he says—not to mention distraction from their work.

During the pandemic, the US government allowed workers to dip into retirement accounts with no penalties for three years. That grace period has disappeared, along with other government financial support. This can create seemingly sudden pressures on employers. The risk for employers is that workers will seek higher paychecks, internally at first. “Workers are going to get more aggressive in looking for compensation increases,” says Jacob Zabkowicz, vice president and general manager of the Global RPO practice at Korn Ferry.

Those dipping into their 401(k)s still represent a small fraction of retirement-account holders. But experts say employees who can’t make ends meet present at least three types of problems to managers: retention woes (workers leave for higher-paying positions); staff spread too thin (because they have to pursue side hustles); and sudden exits (departing employees can receive a check for their retirement account and later pay a penalty—a maneuver some may not know is available—versus jumping through hoops to borrow against that account).

Theoretically, paying workers more solves the problem. But in many businesses, increased compensation isn’t an option this season. “Business is kind of tough right now—there’s not a lot of extra money to go around,” says retail expert Craig Rowley, senior client partner at Korn Ferry. When workers are reaching into their retirement accounts, he suggests, managers should think through what they can do to help, whether that’s finding a higher-paying job internally or creating more hours. He also advises managers to have a backup plan for reallocating work should employees leave.

The trend should spark an internal look at compensation packages and benefits, McMullen says. Firms could, for example, seek more partnerships with retailers to offer employee discounts, or offer more financial-literacy training. “This situation is usually a symptom of a larger problem, and employers can help,” he says.


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