401(k)s Now Pull Double Duty as Emergency Funds

More Americans than ever are contributing to — and withdrawing from — their 401(k)s.

In 2024, a record 4.8% of workers with these retirement plans took a hardship distribution for financial emergencies, The Wall Street Journal (WSJ) reported Saturday (July 26), citing data from Vanguard Group.

Meanwhile, close to a third of people who leave their jobs each year liquidate their 401(k)s, paying taxes and often penalties rather than putting the money in a retirement fund, the report added. At the same time, lawmakers have continually made it easier to dip into these accounts.

All of this, WSJ said, has ushered in a sea change in how Americans see their retirement savings. There is more than $12 trillion in 401(k)s, but it’s not just for retirement anymore, but rather serving as an emergency fund.

The report cited the example of Oliver Widger, who has told his millions of followers about how he cashed out his 401(k) after being diagnosed with a rare health condition. He shares videos about how he and his cat are traveling the world on the boat he purchased, and said in a recent TV interview that “the only regret I have is not doing it sooner.”

This is happening at a time when a significant portion of consumers routinely face major unplanned expenses, per research by PTMNTS Intelligence.

The PYMNTS report, “Managing Unplanned Expenses: How the Pay Later Economy Fits Consumer Needs,” underlines the pervasive nature of unexpected spending among American consumers, showing that 35% of them had made an emergency purchase of at $250 or more in the previous year.

“These unplanned expenses, which by definition fall outside planned budgets, typically involve significant amounts, with a median cost of $605 for emergency purchases and $497 for impulse buys,” PYMNTS wrote last month. “Common categories for these expenditures include auto parts, home maintenance and repair items, and appliances, with median costs ranging from about $500 to over $2,000.”

In another recent change to 401(k) guidelines, the Department of Labor’s Employee Benefits Security Administration in May revoked a 2022 warning that told fiduciaries to exercise “extreme care” before adding cryptocurrency options to the investment menus for 401(k) retirement plans.

The department said the language in the 2022 guidance was not in keeping with the requirements of the Employee Retirement Income Security Act or with the department’s “historically neutral, principled-based approach to fiduciary investment decisions.”

“The Biden administration’s department of labor made a choice to put their thumb on the scale,” U.S. Secretary of Labor Lori Chavez-DeRemer said in a news release. “We’re rolling back this overreach and making it clear that investment decisions should be made by fiduciaries, not D.C. bureaucrats.”