The Hidden Toll of 401(k) Cashouts: Why the System Needs a Rethink

Most people assume their 401(k) will carry them through retirement, but what happens when those funds start leaking out long before they should? Employers recognize the issue of early withdrawals, but few grasp the full scale of the damage. It’s not just about lost savings—it’s about financial insecurity, stress, and a retirement system that isn’t working for everyone.

Ted Benna’s Take: The 401(k) Wasn’t Built for This

The so-called ‘father of the 401(k),’ Ted Benna, never envisioned the plan becoming the primary retirement vehicle for American workers. In fact, he now believes it’s failing middle- and low-income earners. The system forces workers to shoulder all the risk while making it too easy to drain savings in times of crisis. And the data backs him up.

Why Are Workers Tapping Into Their 401(k)s?

People aren’t withdrawing retirement savings for fun—they’re doing it to survive. Job changes, medical bills, housing costs, and inflation push workers to take out loans, hardship withdrawals, or cash out their accounts entirely. According to Fidelity’s Q1 2024 analysis, nearly 18% of workers had active 401(k) loans—a sign that too many employees are using their retirement funds as emergency savings.

The Ripple Effect of 401(k) Withdrawals

The damage doesn’t end with the initial withdrawal. The consequences compound over time, impacting both employees and employers:

For Employees:

• Lost Growth Potential: A single $10,000 withdrawal at age 35 could mean losing up to $40,000 by retirement due to missed compounding interest.
• Harsh Penalties & Taxes: Early withdrawals come with a 10% penalty and tax obligations, further reducing take-home cash.
• Financial Instability: Those who drain their retirement funds often struggle to rebuild them, leading to long-term insecurity and stress.

For Employers:

• Higher Turnover & Admin Costs: Employees facing financial hardship are more likely to leave for higher pay, forcing companies to spend more on recruiting and onboarding.
• Lower Productivity: Financial stress leads to distraction, absenteeism, and burnout—impacting overall workplace efficiency.
• A Weaker Workforce: If employees can’t retire on time due to depleted savings, they remain in the workforce longer, affecting succession planning and career progression for younger employees.

Five Years of Leakage: What’s Really at Stake?

Many assume small withdrawals won’t make a huge difference, but over five years, the effect is staggering:

• Employees may lose tens of thousands in potential savings.
• Businesses may see increased HR costs due to financial stress-related turnover.
• The overall retirement crisis deepens, affecting future generations.

Fixing the System: Real Solutions, Not Band-Aids

Employers can’t solve America’s retirement crisis alone, but they can take action to help employees keep their savings intact. Here’s how:

Create Emergency Savings Programs

Ted Benna has long advocated for separating short-term and long-term savings. Employers can offer payroll-deducted emergency savings accounts, so employees have a cushion without raiding their 401(k)s.

Boost Financial Education

Many employees don’t realize the true cost of early withdrawals. Providing education on penalties, lost investment growth, and alternative options can help workers make informed choices.

Simplify 401(k) Rollovers

One of the biggest sources of leakage happens when workers change jobs. Auto-portability solutions can help employees seamlessly transfer their retirement funds instead of cashing out.

Rethink Loan & Hardship Withdrawal Policies

Employers can provide better options, such as structured repayment plans or lower-interest borrowing alternatives, to reduce default rates.

Strengthen Employer Contributions

Matching programs can incentivize employees to leave funds in their accounts. Increased contributions show a company’s commitment to long-term employee well-being.

Rethinking Retirement for a More Secure Future

The 401(k) was never designed to be the sole retirement vehicle for American workers. As Ted Benna himself has pointed out, the system needs reform to better serve those who need it most. Employers who take proactive steps—through emergency savings, education, and better plan features—won’t just help their employees. They’ll build a stronger, more stable workforce for the future.

It’s time to stop the leaks and rethink what retirement savings should really look like.