Plan Sponsors Look to Financial Wellness to Protect Against Growing Plan Leakage

Plan sponsors are increasingly viewing their financial wellness programs as strategic tools for reducing plan leakage and improving retirement outcomes, rather than simply as an employee benefit. The shift comes as years of inflation, higher borrowing costs, stagnant wage growth for many workers and the return of student loan repayments have strained household finances.

“There is simply less room for discretionary saving than in prior generations,” says David Ashner, a principal in Groom Law Group.

As a result, participants often turn to hardship withdrawals from their retirement plans to cover immediate needs, even as they continue contributing to their retirement accounts. Unlike a standard 401(k) loan, hardship distributions cannot be paid back into the retirement account, resulting in a permanent loss of retirement principal and compound growth.

“Leakage matters because even small, incremental withdrawals can erode long-term retirement outcomes,” says Dan Morrison, president of retirement at Ascensus.

Last year, 6% of Vanguard participants took a hardship withdrawal, up from just 2% in 2021, according to the company’s annual report. The report also showed that about 13% of plan participants had an outstanding loan, a level that has remained consistent over the past three years and suggests some participants have ongoing liquidity needs.

Less Friction for Withdrawals Under SECURE 2.0

The SECURE 2.0 Act of 2022 allows in-plan emergency savings accounts and provides some new flexibility for retirement plan withdrawals and loans, offering penalty-free, self-certified emergency distributions and repayable short-term loan options (up to $1,000 once per year), without halting ongoing contributions. Nearly 60% of plan sponsors surveyed by Callan this year have decided not to offer in-plan emergency savings accounts, but they have made emergency withdrawals available.

“We see people having a harder time covering their bills, which is leading people to have to tap money that they have, and generally, retirement plans are one of the few places that they will have extra cash or resources, beyond their typical day-to-day checking account savings,” says Craig Copeland, the director of wealth benefits at the Employee Benefits Research Institute.

The increase in hardship withdrawals, along with other evidence of employee financial stress, has prompted more plan sponsors to re-examine their financial wellness tools through the lens of preserving long-term retirement security for participants.

“The overriding concern is that participants will start to use their long-term retirement savings account more and more like a checking account, and that was never the intention of the 401(k) program to start with,” says Kurt Fauerbach, head of workplace at Edelman Financial Engines.

Some plan sponsors are contemplating requiring participants to check in with a financial adviser before making withdrawals, Fauerbach says, but he is unaware of any that have taken that step. Still, more than 80% of plan sponsors say they feel responsible for supporting their employees’ financial well-being, according to J.P. Morgan Asset Management’s 2025 Defined Contribution Plan Sponsor Survey.

There is also recognition that employees distracted by debt or short-term liquidity constraints in their personal finances tend to opt out of 401(k)s or lower their contribution rates. However, prohibiting withdrawals is not the answer.

“You want to let your employees have access to their savings if they need it, because if they don’t, they might not be willing to save in the first place,” Ashner says.

Leaning Into Financial Wellness Programming

Employers concerned about plan leakage are looking to financial wellness programs to reduce their employees’ need to tap retirement assets in the first place, according to Sara Vipond, a wealth research consultant with Mercer.

“Sponsors can help employees identify alternatives such as emergency savings accounts, emergency hardship funds and short-term financial programs like employer-backed personal loans,” Vipond says. “It’s also important to provide financial education and coaching so employees understand the long-term trade-offs of taking money out of the plan.”

When asked by Mercer to identify the top three priorities for their plans this year, 39 percent of plan sponsor respondents cited expanding financial wellness programs as their top priority. Such programming can help employees identify practical next steps, connect with appropriate resources and build confidence in their financial decisionmaking.

“It helps convert a moment of stress into a guided action plan, rather than a costly leakage event,” Vipond says.

Plan sponsors are also expanding communication strategies beyond just investment education to include debt management, budgeting, and building liquid emergency funds.

“Employers are really taking a more holistic view of people’s finances,” Copeland says. “They’re understanding that if people don’t have their finances in order, it’s really hard to then set aside money for retirement on a consistent basis.”

Targeted Communication and Education

This might include communication intended to reach participants before they take plan loans or hardship withdrawals. Research from Financial Finesse showed that targeted, event-driven communication resulted in 13 times more engagement than generic outreach with comparable retirement content.

“It’s important [for participants] to have access to both digital tools and education in the form of webinars, on-site services and access to articles, so you can meet employees where they are,” Fauerbach says.

Employers are also looking to other, proactive, preventive financial wellness tools, rather than simply adding passive education content. These include financial coaching and advice, managed accounts, and access to third-party wellness providers.

Providing structured tools for managing debt and emergency savings directly reduces hardship withdrawals and premature 401(k) cash-outs. A Vanguard study found that plans with an integrated emergency savings account had a 16% lower hardship and withdrawal rate. Mercer’s research showed that plan sponsors largely found their financial wellness programs were meeting or exceeding expectations, as measured by engagement metrics, financial improvements and retirement readiness.

“There does seem to be a pretty strong correlation between people taking advantage of these [financial wellness] benefits, and reducing their stress and having better success with their finances,” Copeland says.