An employee just got off a difficult phone call with their mortgage lender – they can't afford their monthly payment for the third month in a row. They're frustrated and more than likely, ready to do whatever it takes to keep their home. Their next call is to your client's HR department.
HR professionals are overwhelmed with calls like this; their employee wants to take a hardship withdrawal from their retirement plan and they could use some help communicating the consequences of pulling from one's retirement plan, along with the backlash they get when employees eventually get their tax bill.
But it's not just HR that hardship withdrawals and loans hurt. For the participant, it means a possible and often unexpected tax bill next year. For you, it means depleting your plan's assets.
Recommended For You
Unfortunately, participants' pulling from their plans is becoming more common. Since the beginning of 2009, calls to our financial helpline about hardship withdrawals and loans increased from 9 percent to 18 percent. Only 3 percent of employees who called had questions on investing and questions about increasing plan contributions were virtually non-existent. This tells us the last thing on employees' minds is increasing their plan contribution. So what can you do about it?
Even though HR can feel like the bearer of bad news for any employee taking a withdrawal from their plan, they can use this opportunity to help their employees understand how it affects their retirement. You can help protect your plan assets by putting together a hardship toolkit or checklist for your clients' HR departments that will help them deliver beneficial information. Include the following tools and tips:
- Consider more liquid resources. A hardship withdrawal should be a last resort. HR can help employees by asking them if they've looked into every other possible avenue for the funds before tapping their retirement.
- Use this time to build an emergency fund. Many times, employees often have to suspend contributions to a 401(k) after taking the hardship so this is a good time to build an emergency fund instead.
- Offer a retirement calculator. Give HR a retirement savings calculator they can easily send to their employees so they can ensure they are able to rebuild their retirement after they take the withdrawal.
- Suggest they withhold taxes at the time of distribution so they aren't hit with a tax bill when they file for the year. This is often overlooked and HR receives most of its calls from frustrated employees because the employee simply didn't realize they would incur these taxes later on.
Providing a resource like a hardship toolkit is invaluable to your client's HR team. Even when times are hard and participants' focus is on the monthly bills, you can help by offering resources they can use to get back on track and become more proactive about future decisions to pull from their plan. You may not be the one getting the frustrated call directly this tax season, but the best way to protect your company's asset base is to do something to help make sure HR doesn't get as many of them.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
