If you have a defined contribution plan, such as a 401(k), you should be eligible for a
hardship withdrawal. Such withdrawals are generally permitted when expenses are deemed to be immediate and significant.
Although best practices have been to limit loans and other causes of plan "leakage," loan and
hardship withdrawal features are more common among plans overseen by an adviser; 83.1% of plans with an adviser permit loans, compared to 76.9% of plans without an adviser, and 92.4% of plans with an adviser allow
hardship withdrawals, compared to 86.7% of plans without.
In spite of the perceived necessity, retirement savers almost never see a long-term improvement in their financial situation by choosing a loan or even a
hardship withdrawal, Fidelity says.
Hardship withdrawal provision***89.40%***86.70%***3.10%
However, through loans or
hardship withdrawal provisions, money can be taken out of the plan before participants reach retirement age.
HOW TO RESOLVE: To help stop loan and hardship problems from happening, Kalish says, sponsors need to understand that the current self-serve environment for participants who want to take a loan or
hardship withdrawal should have its limits.
90.2%, or
hardship withdrawal provisions, 84.9% vs.
Sampson advises sponsors to consider allowing participants to take loans only to address an immediate need, though this would differ from taking an outright
hardship withdrawal.
Similar percentages apply to provisions for a
hardship withdrawal. In total, 14.4% of plan participants have at least one outstanding loan.Why even offer these provisions?
"Having loan and
hardship withdrawal features in a 401(k) plan is a mixed blessing-too handy for some folks, although most tend to leave it alone."
Both the decline in financial wellness and the increase in the percentage of employees who reported taking a retirement plan loan or
hardship withdrawal were most pronounced among lower-income employees, women and members of Generation X.