The Alarming Truth: Your Employees Are Draining Their 401(k)s, and Why You Should Care

By Mrs. Shay Cook, CEO & Founder of Crusaders for Change, LLC (C4C) Accredited Financial Counselor® & Financial Fitness Coach®

It's a stark reality check for employers across America: the lines between retirement savings and emergency funds are blurring, and it's happening right within your workforce. We're seeing a disturbing trend where more and more Americans are draining and withdrawing early from their 401(k)s, treating them not as long-term retirement plans, but as immediate lifelines to make ends meet.

According to Empower CEO Ed Murphy, 401(k) hardship withdrawals are running 15% to 20% above the historical norm.

As the second-largest retirement plan provider in the U.S. by participant numbers, Empower's observation is a powerful indicator of widespread financial distress among employees. This isn't just a concern for individuals; it has significant implications for businesses. When employees dip into their retirement savings, it's a symptom of deeper financial vulnerability that impacts their well-being, focus, and ultimately, their productivity at work.

The Fear is Real: Running Out of Money Tops Even the Fear of Death

The gravity of this situation is underscored by alarming findings from the 2025 Annual Retirement Study by the Allianz Center for the Future of Retirement:

• 64% of Americans worry more about running out of money than death. This profound level of financial anxiety is a massive burden on your employees' mental health.

• 62% say they are not saving as much for retirement as they would like. This directly connects to the 401(k) withdrawal trend – they're using funds intended for the future to solve present-day crises.

• 54% cite inflation as a key contributor to their fear of running out of money. The rising cost of living is pushing many to the brink, forcing difficult financial decisions.

What penalties are there for early 401(k) withdrawal?

• Penalties and Taxes: Hardship withdrawals often come with significant taxes and penalties, reducing the amount available and hindering future growth.

• Lost Growth Potential: The money withdrawn misses out on years of potential investment returns, creating a much larger deficit in their retirement nest egg.

• Increased Financial Stress: The act of withdrawing from retirement often indicates desperation, perpetuating the very stress they're trying to alleviate.

Withdrawing money early from a 401(k)—before the age of 59½—usually comes with significant penalties. In most cases, you’ll have to pay a 10% early withdrawal penalty on top of regular income taxes, which can add up quickly depending on your tax bracket. For example, if you take out $10,000, you could lose $3,000 or more to taxes and penalties, leaving you with much less than you expected.

While there are exceptions—such as permanent disability, certain medical expenses, or separating from your job at age 55 or older—most early withdrawals are costly. If you're facing financial hardship, there may be better options, like a 401(k) loan or building an emergency fund, that won’t jeopardize your retirement savings.

Why do people still choose to withdraw early from their 401(k)?

When employees are forced to use their 401(k)s as emergency funds, it signals a critical gap in their personal financial safety nets. A 401(k) is designed for retirement, offering tax advantages and compounding growth over decades. When it's prematurely accessed, employees face:

• 35% of hardship withdrawals from 401ks were used to avoid eviction or foreclosure

• 30% were for medical expenses

• 16% were for home purchases or repairs

Why do early 401(k) withdrawals matter to employers?

This pervasive financial insecurity translates directly into the workplace. Employees battling constant financial worries are:

• Less Productive: Their minds are frequently consumed by budgeting crises, bill juggling, and looming financial deadlines. This mental distraction directly impairs their ability to focus on tasks, leads to errors, and slows down project completion. The mental bandwidth they should be dedicating to their work is instead spent on anxiety-driven calculations and worries.

• More Absent: Financial emergencies, whether it's a car breakdown, an unexpected medical bill, or an urgent family need, often require immediate attention that forces employees to take time off. This results in unscheduled absences, disrupts team workflow, and places additional burdens on colleagues.

• Less Engaged: Financial anxiety saps morale, diminishes enthusiasm, and erodes commitment. When employees are constantly worried about their personal finances, their emotional reserves are depleted, making it harder for them to be fully present, proactive, and invested in their roles or the company's mission. Their focus shifts from contribution to survival.

• Prone to Burnout: The endless cycle of financial stress—the fear of not having enough, the constant juggling, the lack of a safety net—creates a state of chronic stress. This emotional and mental toll can lead to severe burnout, characterized by exhaustion, cynicism, and reduced professional efficacy, potentially leading to long-term health issues and increased turnover.

The Solution: Proactive Employee Financial Wellness Programs

This alarming trend is a clear call to action for employers. Traditional benefits like a 401(k) alone are not enough if employees lack the foundational financial resilience to use them as intended. This is where comprehensive employee financial wellness programs, like those offered by Crusaders for Change®, become indispensable.

At Crusaders for Change, we address the root causes of financial stress and equip your employees with the tools they need to build true financial security. We can help by creating a robust emergency savings plan that ensures employees have a cushion for unexpected expenses, preventing them from resorting to their retirement funds.

Our Financial Employee Wellness Programs focus on:

• Building Emergency Savings: Guiding employees step-by-step to create and fund an accessible emergency savings account, so their 401(k) can stay untouched for retirement.

• Debt Management: Providing strategies to reduce burdensome debt, freeing up cash flow for saving.

• Practical Budgeting: Empowering employees to create realistic budgets that work for their lives, ensuring they know where their money is going.

• Unbiased Financial Counseling: Offering confidential, personalized support to help employees navigate their specific financial challenges without the pressure of product sales.

Your employees are clearly worried about their financial future. By providing a comprehensive financial wellness program, you can directly address their biggest fears, help them preserve their 401(k)s for retirement, and cultivate a more secure, productive, and engaged workforce.

Don't let the alarming statistics become your company's reality. It's time to equip your employees with the financial resilience they need to thrive. Crusaders for Change Employee Financial Wellness Programs are the answer.