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Bank of America’s recent data reveals a concerning trend: more Americans are tapping into their 401(k) accounts due to financial difficulties.
In the second quarter of 2023, the number of people making hardship withdrawals increased by 36% compared to the same period in 2022, reaching 15,950 withdrawals. The trend has prompted worries from experts, such as LendingTree’s Matt Schulz, who told CNN it is “pretty troubling,” and emphasizes the high long-term costs of such withdrawals.
“You understand why people do that in the heat of the moment, but the opportunity costs on that are really, really high over time,” he told the outlet.
The report also shows a rise in participants borrowing from workplace plans and a decrease in average contributions.
While overall employee contributions remained stable during the first half of the year, a larger portion of participants increased their contribution rates rather than decreasing them.
Related: Here’s Everything You Need to Know About 401(k) Contribution Limits for 2023
“The data from our report tells two stories – one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” said Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, in a statement. “This year, more employees are understandably prioritizing short-term expenses over long-term saving. However, it’s critical that employees continue to invest in life’s biggest expense – retirement.”
The current economic landscape, marked by a robust labor market, overall economic growth, and increased consumer spending, is contrasted by the lingering effects of the global pandemic and persistently high inflation. Household finances have been strained, with household debt balances growing by nearly $3 trillion since 2019, according to New York Federal Reserve data for Q1 2023.
Furthermore, a separate report from the New York Fed disclosed that U.S. households’ credit card debt has exceeded $1 trillion for the first time, which — combined with other forms of debt — pushed total household debt to $17.06 trillion by the end of the second quarter.
“There’s only so much hard debt that people can handle before delinquencies really spike,” Schulz told CNN. “Ultimately, you just have a lot of people who are doing OK now, but it wouldn’t take a whole lot for them to find themselves in a pretty sticky situation financially, whether that is a medical emergency, job loss, or even just student loan payments restarting.”
Related: Supreme Court Blocks Biden’s Student Loan Forgiveness Plan — Here’s How It May Affect the Economy
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