Billions of dollars are leaking from 401(k) plans every year, draining millions of Americans' retirement savings and potentially delaying their retirements by years. It's an opportunity for financial advisors to grab a metaphorical pipe wrench and play plumber to stem the leak and protect workers' retirements.

The Pension Research Council (PRC) at the Wharton School, University of Pennsylvania reports that one in 10 401(k) plan loans wind up in default, sucking $6 billion a year from defined contribution plans (Borrowing from the Future:401(k) Plan Loans and Loan Defaults, Pension Research Council, Wharton School, University of Pennsylvania). Often, the unpaid loans are by employees who have tight financial circumstances and lack liquidity options to address financial emergencies.

Many middle-income workers – those with annual household incomes of between $35,000 and $150,000 – struggle to deal with financial emergencies, according to the 2017 MassMutual Middle America Financial Security Study. Often, the choices they make are harmful from a long-term financial perspective.

When faced with a $500 emergency, for instance, 58 percent would use a credit card, the Middle America study shows. While 14 percent overall say they would withdraw or borrow money from their 401(k), one in four (24 percent) of those with less than $45,000 in household income would go that route.

The statistics grow bleaker with a $5,000 emergency. While 38 percent would hit up family or friends and 37 percent would use a credit card, one in four (25 percent) would tap their 401(k). Remarkably, the worst offenders were those with household incomes of between $75,000 and $150,000. If left unattended, the leak could become a flood.

It's a concern not only for workers who took money from their retirement plan but for their employers as well. There are some strategies for employers to tighten the 401(k) spigot as well as provide alternative sources of cash to help employees better manage emergencies as they crop up.

Employers have different views when it comes to making retirement plan savings available to employees in the form of hardship loans, withdrawals or both. While not all employers allow such activities, many do and often have liberal rules, allowing multiple loans and relatively high dollar limits.

Financial advisors can suggest that sponsors limit loans and withdrawals. For instance, if loans are allowed, restrict participants to a single outstanding loan at any given time. Dollar amounts for both loans and withdrawals can be capped as well.

But what happens when an employee is faced with a financial emergency and has few other choices than to tap his or her retirement savings? It's a legitimate concern.

Some employers are making available voluntary benefits that are designed to help employees address financial emergencies, especially those that stem from medical emergencies:

Pre-approved emergency loans: Some programs allow employees to obtain credit online without having to fill out forms or visit a bank. The most helpful programs prequalify employees for credit based on their employment and their ability to repay. Often, employees can repay the loans through payroll deduction. The rates on these loans can often have relatively low interest rates when compared to credit cards. While that rate may be higher than the rates assessed on many retirement plan loans, it may be low enough to discourage borrowing from retirement plans and potentially missing out on market experience.
Critical illness insurance coverage: Medical treatment and other expenses related to a serious illness can quickly run into several thousands of dollars, especially with the growing prevalence of high-deductible health care coverage. Critical illness insurance policies provide cash for insureds to use for a myriad of expenses, from medical deductibles and co-pays to pharmaceuticals and comfort-related costs if an employee or a family member suffers a covered illness.
Accident insurance: Few emergencies can derail personal finances more quickly than an accidental injury, especially for those who live paycheck to paycheck. And, injuries are more prevalent than many people realize. The U.S. Centers for Disease Control reports that emergency rooms treat more than 40 million injuries a year across the country (Centers for Disease Control, Home & Recreational Safety). Policies typically pay benefits in a lump sum, which can be used to help cover any expense, including medical insurance deductibles, co-pays, lost income from down time from work and other unanticipated expenses.

All of these benefits are available on a voluntary basis, meaning the employee is responsible for the premiums at group rates or other costs. Employers can also choose to make the benefits available on a contributory basis, meaning the employer and employee share the costs, or on an employer-paid basis.

Taken together or individually, these protection benefits may help provide workers with financial tools to better manage the costs associated with some misfortunes rather than tapping their retirement or personal savings. Protecting savings – especially retirement savings – may promote long-term financial wellness and can help reduce stress at the workplace.

The ultimate goal is to discourage employees from siphoning money from already-modest 401(k) balances and seal up as much leakage as possible. By helping employees better cope with shorter-term financial challenges, they may be better able to contribute to and preserve their existing retirement savings.

To learn more, visit http://www.massmutualatwork.com/ or call 1-855-877-6161.

E. Thomas Foster Jr. is head of strategic relationships for retirement plans for Massachusetts

Mutual Life Insurance Co. (MassMutual).

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