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Huge Problem: Employees Are Using 401(k) Loans as Emergency Savings

What would you think if you knew an employee at your company was saving 15% of every paycheck in a company 401(k)? You’d probably think he was making a smart move that benefits both him and the company. And you’d be right!

But what if you heard the same employee had taken out a loan against his 401(k) savings that was nearly the whole amount of the balance? That wouldn’t be nearly as encouraging, for either him or your company.

This isn’t just a hypothetical scenario. It’s an accurate sketch of what often happens in company 401(k) plans nationwide. What’s causing this problem, and is there anything you can do to stop your employees from raiding their retirement plans?

When Emergencies Strike, Many People Have No Plan

If nothing ever went wrong in life, investing in a 401(k) (and leaving the money alone) would be easy and far more common. But life is full of surprises—often expensive ones.

It’s not a question of if one will strike in your employees’ lives, but when.

Does your business have the right insurance? Connect with a local pro to learn more.

Children suffer broken bones, hot water heaters gush, and vehicles malfunction with uncanny timing. Whether it’s an emergency room visit, a flooded basement or a slipping transmission, we’re all bound to face unexpected events that can quickly cost thousands of dollars.

This fact should have an impact on how we plan for emergencies, but it doesn’t. The sad truth is 64% of Americans would be unable to cover a $1,000 emergency without borrowing money. So when tough times hit your employees, many of them turn to their retirement savings, risking their plans for tomorrow to get quick relief today.

Without Emergency Funds, 401(k)s Take a Beating

 

About a fifth of eligible participants in company 401(k)s are currently borrowing against those plans because they don’t have enough money saved for emergencies. Since the money in their 401(k) is often the only significant amount of money your employees have ever saved, it’s easy to see why they’d turn to it to cover a crisis.

As someone responsible for handling benefits issues, you’re likely aware of this trend, and you know it’s damaging your employees’ chances for a comfortable retirement. Even worse, it’s a cycle that will continue to churn out of control until your employees address the real problem: the failure to plan ahead and budget money for life’s inevitable shocks.

Two out of three members of your workforce have no plan for a financial emergency. If you don’t empower and motivate them to get a plan in place, they’ll continue to drain retirement savings! So what can you do to help your own team through the rainy days?

Motivating Better Money Habits to Transform Lives

Imagine how you’d feel if your child or someone you loved needed a live-saving, $1,000 medical procedure. You’d do whatever necessary to raise the money and get the procedure done! We all would!

Your financial wellness program should motivate your employees and help them see how essential smart money habits, like socking away a $1,000 emergency fund, are to maintaining their financial health. When employees understand how an emergency fund prevents disastrous financial choices like taking out a 401(k) loan, they’ll do anything necessary to get theirs in place.

Everyone knows the right thing to do with money, but succeeding in personal finance is only 20% head knowledge—the remaining 80% is behavior! With the right financial wellness program, you can encourage your employees to do the things they already know they should be doing by giving them the confidence to follow through.

Look for a program that’s designed to teach your employees how to get their basic financial foundation in place through budgeting, building an emergency fund, and eliminating debt. With that foundation, your employees will finally be able to cover emergencies with their own cash and use their retirement savings for one thing, and one thing only: retirement.

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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