How often have you heard someone say they’re not saving for retirement because they can’t afford to risk locking up their money for the long term? What if they had more financial flexibility when the unexpected arises? A provision within the SECURE 2.0 legislation offers an opportunity to add this near-term financial flexibility to retirement savings. One of the policy’s provisions allows employees to withdraw up to $1,000 penalty-free from their 401(k)-retirement account once a year for financial needs relating to personal or family emergency expenses.
Under this new provision, the impact on workplace savers’ financial security could be powerful. A worker could request up to $1,000 or less for unexpected expenses, which will be transferred via ACH to their bank account within 3-5 days, and then allow ongoing retirement account contributions to repay the withdrawal. Plan participants must repay the emergency withdrawal amount within three years or pay income tax on the withdrawal, and only employees of participating plan sponsors and recordkeepers are eligible.
Saving for emergencies is a significant concern for Americans(opens in a new tab) earning low-to-moderate income (LMI). The increased stress people feel from this lack of emergency savings can significantly impact their quality of life(opens in a new tab) and their ability to be productive at work(opens in a new tab). Historically, retirement savings have been viewed as a source of savings—even with a penalty for early withdrawal(opens in a new tab). A Voya study found employees without sufficient emergency savings are 13 times more likely to take out a hardship withdrawal(opens in a new tab) than their peers with sufficient emergency savings. The $1,000 emergency withdrawal option allows employees with an existing retirement fund to avoid taking out a loan or hardship withdrawal.
To fully understand the potential of the new $1,000 option and how employees engage with it, Commonwealth and Voya have collaborated on a pilot as part of BlackRock’s philanthropic Emergency Savings Initiative(opens in a new tab) to proactively market it to LMI employees. Voya and Commonwealth created clear marketing materials to easily communicate the new $1,000 emergency withdrawal process for employees. While more research is required, early findings suggest that the $1,000 emergency withdrawal provision may encourage greater participation in the workplace retirement plan.
Data shows emergency savings support plan participation and positive feeling
Offering the $1,000 emergency withdrawal provision could increase retirement plan participation, as many employees don’t enroll(opens in a new tab) often due to a lack of liquidity of funds(opens in a new tab). Commonwealth research found focus group participants, comprised of employees of diverse ages, genders, and ethnicities earning less than $80,000, responded positively to the $1,000 option, demonstrating that a penalty-free emergency withdrawal could positively impact how employees approach retirement savings. This is evident as Voya has also seen from its participant data that those who do feel financially secure—meaning they have emergency savings of three plus months of living expenses—on average, contribute about 50% more to their long-term retirement plan than those who acknowledge that they don’t feel financially secure. Not only do these individuals save more (51% more, in fact), but they’re also, on average, on track for positive retirement outcomes and have a higher income replacement (14% higher).
The focus groups also documented that participants liked the $1,000 emergency option as an alternative to taking a loan or incurring debt—a crucial tool for creating financial stability and long-term wealth-building.
Lastly, focus group participants strongly believed that one should not withdraw from a retirement plan but described the $1,000 option as a “good backup” for emergencies.
Research regarding the impact of the COVID Cares Act’s removal of the 10% penalty(opens in a new tab) found just “modest usage” of coronavirus-related distributions, providing evidence that concern about too many withdrawals might be overstated. During the COVID pandemic, Voya found that those who took out coronavirus-related distributions often took more than needed which indicates a smaller first option might be very beneficial to preventing leakage.(opens in a new tab) The $1,000 emergency withdrawal is a starting point for employees in crisis that could help prevent more harmful leakage and offer the potential to increase retirement participation. This is evident as Voya’s participant data for a large corporate employer reveals that 90% of those who utilized the emergency withdrawal option continued to contribute to their retirement plans, suggesting that they managed to either partially or fully repay the withdrawn amount. Notably, 66% of participants have already completely repaid their emergency withdrawal, underscoring the effectiveness of this support mechanism in maintaining retirement savings momentum.
To be sure, there are still many unknowns about the impact of the $1,000 emergency withdrawal option on long-term retirement savings, but it has the potential to positively impact participation and regular contributions while stopping more significant leakage over time. Recordkeepers and employers have a valuable opportunity to provide meaningful emergency savings and retirement-building solutions by offering employees the $1,000 emergency withdrawal option and promoting it in ways that link to participation and withdrawal concerns.
The provision is straightforward and viable for retirement administrators, and it offers a simple activation option for plan sponsors to add to an existing plan. It can be coupled with the Domestic Abuse Victim Withdrawal Provision and Qualified Disaster Recovery Distributions (QDRD) provision. We recommend plan sponsors should consider adopting this new tool to support workers, especially those earning LMI and experiencing an emergency expense.
Originally published on PlanSponsor(opens in a new tab)
¹Voya internal data, October 2020.
²Voya internal data, October 2020.
³Voya Financial participant data, among a large corporate employer, who took an emergency withdrawal between Jan. 1-Sept. 30, 2024, and studied their contribution behavior after taking that withdrawal through Dec. 31, 2024.
