As a large number of people face financial difficulties, many use their 401(k) accounts to bail themselves out of liquidity crises. Changes in this trend have begun to influence how retirement savings are used. If you have a 401(k), the changes could have a significant impact on your finances. Here are two painfully destructive 401(k) plan changes that may surprise you.
Here’s why hardship withdrawals are rising fast among more Americans
A record number of Americans are making hardship withdrawals from their 401(k) plans. In 2023, 3.6% of account holders withdrew funds due to financial hardship, while in 2024, 4.8% did so.
The sharp increase in people using their retirement savings to cover urgent expenses clearly indicates rising financial distress. The most common reasons people apply for assistance are to avoid foreclosure, avoid eviction, and pay medical bills.
Because they involve penalties and taxes, they are typically considered a last resort. As a result, prior to the pandemic, account holders made only a small number of hardship withdrawals (around 2%) per year. This dramatic increase indicates that financial emergencies for many Americans have become more common.
Recent changes to the law have also made it easier to request hardship withdrawals. However, in 2018, legislation ended the practice of requiring workers to repay a loan before breaking up due to hardship. Automatic enrollment in retirement plans, combined with this, has contributed to the rise in hardship withdrawals.
Taking money early? Accept that penalties may empty your retirement funds
Workers must wait 59 years and six months before receiving penalty-free 401(k) distributions. In other cases, if they withdraw funds before this age due to hardship, they will be charged a 10% early distribution tax, unless an exemption applies. Traditional 401(k) plan holders must pay income taxes on withdrawals, resulting in a lower after-tax amount.
The critical limitation of hardship withdrawals is that the withdrawn 401(k) funds are ineligible for reseeding into your account or an IRA. Money withdrawn from retirement accounts through hardship exits cannot be recovered, so retirement fund amounts are permanently reduced, potentially causing financial difficulties for the elderly.
Employees are withdrawing funds through hardship programs at a higher rate, indicating that workers are experiencing increasing financial difficulties. In 2024, credit card delinquencies in the United States reached their highest level in over a decade. Rising prices and more Americans’ inability to pay for car installments eroded consumer confidence.

The automated enrollment policy has generated positive results but creates unforeseen difficulties
Businesses across the industry are now regularly enrolling their employees in retirement plans as part of their employee benefits packages, and the retirement savings rate is steadily increasing.
The percentage of companies that use automatic enrollment for new employees at 401(k)-type plans increased to 61% in 2024 from 36% in 2014. The increased expansion encourages higher employee participation rates, particularly among workers with lower earnings.
Workers can now withdraw more easily from their retirement accounts thanks to automatic enrollment and new hardship withdrawal guidelines. Early fund withdrawals provide temporary financial relief, but they will have a significant negative impact on their retirement security after they retire.
The number of Americans who must decide whether to use their retirement funds for current expenses or to save for their retirement has increased significantly.
Balancing current financial needs and future savings goals can be challenging. The automatic enrollment system has increased retirement plan memberships while also increasing the number of employees who withdraw their retirement funds before the intended date.
American citizens continue to face a double threat while dealing with financial insecurity.
The growth of 401(k) savings amounts becomes significant
The current financial difficulties have resulted in some positive developments in 401(k) plans. Account balances grew by 10% in 2024, setting a new record of $148,200.
The increase in 401(k) savings was driven by thriving financial markets and employees making larger contributions to their retirement funds, as Americans continue to prioritize long-term savings.
The 2024 plan year saw the highest percentage of participants, raising their savings rate to 45%, the highest level since 2019. Economic challenges have not deterred Americans from prioritizing their retirement savings. Most participants remain committed to long-term financial planning because their hardship withdrawal rates are less than 5%.
Hardship withdrawal statistics demonstrating increased participant levels indicate that people have successfully dealt with their financial problems. Long-term financial endurance among retirement savers will determine their ability to cope with ongoing financial difficulties.
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