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Despite the slight moderation of price increases with the most recent inflation report, economic conditions continue to deteriorate for millions of Americans. Costs remain extremely high, workers are rapidly exhausting their savings, and a recession appears highly likely. One of the most harmful aspects of this economic contraction is the effect it will have on the financial future for many American workers. Employees are already using their savings to cover immediate costs and some are even pulling money out of their retirement accounts.
Withdrawals like this cost workers huge sums of money over the long run and puts them in a precarious financial position when they retire. Companies should be doing everything they can to prevent employees from making early 401(k) withdrawals, such as providing financial advice, flexible benefits, and other forms of financial support as they navigate a difficult economic environment. At a time when companies are struggling to retain talent, implementing policies and programs to help employees manage their financial wellness enables them to maintain a healthy workforce.
Related: Time to repurpose benefits – and avoid employees pulling cash from their 401(k)s
It has never been more important for companies to provide robust financial support for their employees. They not only need assistance to get them through the next few months, but also strengthen their retirement portfolios in the long run.
Putting employees in a stronger financial position
In April 2020, total savings in the U.S. peaked at $6.42 trillion because of pandemic aid and declining consumer activity. This number has now fallen to $555.7 billion, the lowest since August 2009. Meanwhile, retirement savings is falling short, estimated at a deficit of $3.68 trillion and is expected to grow as American workers increasingly pull from their 401(k)s and other retirement accounts to cover urgent budget demands.
Over half of Americans report that they have taken early withdrawals from their retirement accounts. This is a sign of serious financial distress, as these withdrawals subject employees to penalties and tax increases on top of all the lost returns those contributions would have generated over time. This is one of the many reasons companies have a responsibility to help employees get through this downturn and find their way to more solid financial ground. As savings continue to plummet, prices remain high, and the labor market finally begins to cool, employees will be even more inclined to raid their own retirement funds.
While companies can educate employees about the risks of premature retirement withdrawals, they should also provide greater direct financial support. This won't just save employees from potential financial disaster later in their lives, but it will also reduce turnover, improve productivity, and make your company a better place to work.
How your benefits platform can support employees
Employees should know that they're borrowing against their own future when they deplete their retirement accounts. But to prevent them from making such a significant financial mistake, companies have to offer alternatives that will help their employees get through short-term economic volatility and make better long-term choices. HR teams should start by rethinking their benefits packages, which are often out of alignment with employee needs and concerns.
For example, flexibility is a top employee demand right now, but many companies are failing to provide the individualized benefits employees want. While HR teams often think of flexibility in terms of remote work, employees also want professional development opportunities, a better work-life balance (the demand for flexible hours is even stronger than the demand for remote work), and benefits that meet their unique needs. Some employees want access to life planning or health savings accounts, while others are more interested in daycare reimbursements or assistance with student loan payments.
Despite these diverse priorities, companies are still forcing employees to accept one-size-fits-all benefits packages that fail to account for their specific circumstances and preferences. At a time when turnover rates are near record highs and employees are struggling to cover their basic costs, companies can't afford to ignore the increasing demand for flexible benefits.
How companies can provide greater flexibility and support
Employees are facing powerful economic headwinds right now, from the high cost of basic necessities like food and gas to shrinking savings and chaos in the stock market. Premature retirement withdrawals are always a mistake, but this is particularly true when the values of 401(k)s and other accounts have collapsed. Companies have to do more than show employees that early withdrawal is a mistake; they have to provide economic incentives to keep retirement funds where they belong, from higher 401(k) matches to flexible benefits.
HR teams should never assume they know what employees need but instead have open discussions about which benefits will do the most good. Additionally, they should adjust their existing benefits platforms to provide the agility necessary to meet employees where they are. For example, a 2021 PTO Exchange survey of 1,000 employees found that 83% would be very or extremely interested in converting vacation time into other financial resources, while 90% said this sort of benefit would make them more likely to stay with their employers. PTO is a widely underused benefit, so the ability to shift it toward priorities such as emergency funds, student loan payments, and HSAs can be advantageous for employees.
Regardless of which flexible benefits you provide, it's clear that the status quo isn't cutting it anymore. As employees try to make ends meet by pulling money out of their retirement accounts, HR teams should do more than explain why this is the wrong decision – and provide the resources and support that employees need to achieve financial wellness.
Rob Whalen is co-founder and CEO of PTO Exchange.
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