More than 40% of Americans say the pandemic has caused them financial stress, forcing many to look to their 401 (k) to help them weather the storm.
This drastic action showed HR and benefits executives that employees need more than just retirement benefits. While the 401 (k) is obviously an important part of a benefits strategy, it does not contribute to the short-term financial stress that employees are currently experiencing. Without other affordable alternatives, employees can cannibalize their own future financial security to make ends meet today.
More than a third of American workers have withdrawn money from their 401 (k) in the past year and 20% have withdrawn $ 10,000 or more. Almost two-thirds of those who borrowed from their retirement savings say they did so because it was the easiest and cheapest loan option available to them.
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This is unacceptable. In addition to paying income tax on the amount they borrow, workers pay an additional 10% penalty if they are under 59 and a half and quit their job with the loan outstanding. .
And what are the chances that you will terminate your employment during the loan repayment period? This is the worst-case scenario for 401 (k) borrowers, as most plans require you to pay off the loan balance in full within 60-90 days of leaving employment. In this case, about 86% of borrowers default.
Where does this conundrum leave HR and Benefits leaders? Here are three best practices to help employees who are considering borrowing money from their pension fund.
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Create opportunities for your workers to acquire financial literacy. In order to make the right financial decisions, employees need to understand how to manage their money and the financial tools available to them. Unfortunately, less than 60% of Americans are financially literate, and this problem is also quickly becoming a problem with AED. Less than 40% of women are financially literate and 90% of women have an equal share of or lead financial and investment decision making for their household. In its review of the Personal Finance Index, the TIAA Institute found that 38% of black Americans answered index questions correctly, compared to 55% of whites.
As these two business priorities converge, develop a strong education program that includes resources on how to budget, open and monitor bank accounts, set aside emergency cash, set financial goals, understand and improve credit scores, recover from a financial setback and provide opportunities for mentoring.
Add programs that help employees cope with their daily lives. All Americans have lived through trauma since the start of the pandemic. Many of them face issues far deeper than work: Four in 10 Americans provide financial assistance to a parent, sibling, or child, and a third said it has a significant impact on their personal finances .
Progressive companies are stepping up and coming up with their own paid vacation plans to provide greater flexibility for employees. By allowing employees to take paid time off, it also gives them time to find better alternatives to withdrawing money from their 401 (k).
Offer financial benefits that provide an affordable alternative. Whether an employee’s options are to withdraw money from a 401 (k), get a high interest payday loan, or draw on a credit card, employees will naturally choose their 401 (k). ), because it is probably the least risky and the most affordable option. . But it can also be a short-sighted decision that ignores the long-term financial implications.
Voluntary salary-linked benefits offer an alternative to high interest loans or the pain of dipping into retirement funds. By offering low-interest loans or emergency savings accounts, in which repayment and contributions can be easily taken directly from the employee’s paycheck, businesses have the opportunity to have a real impact on the financial well-being of their workers.
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American workers are struggling and, historically, it is not second nature for companies to step in and help. But large companies are becoming more empathetic and there is a real opportunity for them to do good for their employees. By proactively promoting financial literacy and adding broader programs and financial benefits that can give employees some confidence, employers can put employees in a better position not to mortgage their future for the present.