Inflation, Credit Card Debt Drives Up 401(k) Loans, Hardship Withdrawals

Among a study of 5.3 million defined contribution workplace savers in Empower accounts, 0.8% took hardship withdrawals in Q3, and 2.6% took out loans from their savings. Those were the highest rates in the past eight quarters, Empower wrote in its third annual report, “Empowering America’s Financial Journey,” issued Thursday.

Loan and hardship withdrawals taken from workplace retirement plans in the third quarter of 2023 hit their highest levels in more than two years, according to a report from Empower issued Thursday.

Empower attributed the rise in loans and withdrawals to increased credit card debt, higher interest rates, higher costs for everyday goods and the resumption of student loan repayments. In addition to the elevated rates, Empower found through a survey conducted during Q3 that 27% of Americans are “very or somewhat likely” to take out a loan or hardship withdrawal in the next six months.

Generation X, sometimes called the “sandwich generation” for being stuck between aging parents and adult children, is the most likely to have taken out a loan, with Gen X participants making up 54% of active workplace savers with a loan. Overall, 15% of workplace savers have such a loan of, on average, $10,778.

Despite loans and withdrawals rising for some, the majority of savers are remaining “steady,” according to Empower’s findings. In 2023, the average retirement plan savings rate remained steady at about 8%, similar to last year, and average account balances increased by 11% to $91,000 on higher savings account rates and stronger, though still volatile, equity markets, the researchers found.

“Despite the economic challenges American workers are facing, it is reassuring that most are taking positive steps to pursue their financial goals,” Edmund F. Murphy III, Empower’s president and CEO, said in a statement. “Retirement planning is a lifelong commitment, and this study uncovers that 68% of working Americans are confident they will be financially ready for retirement. There is still progress to be made, but I am optimistic our retirement system is providing the tools and solutions that are helping individuals achieve good financial outcomes.”

Tens of thousands of U.S. savers managing student loan debt received some good news Wednesday, with the administration of President Joe Biden announcing student debt cancellation for 80,300 people, totaling up to $4.8 billion. The administration noted that it has, thus far, approved $132 billion worth of student debt cancellation for 3.6 million people.

Making Ends Meet

While Americans have continued to save for retirement in 2023, only 11% of those surveyed by Empower think they are saving enough. The top factors limiting their ability to save were the “need to make ends meet” (36%), inflation (35%) and paying back debt (29%).

Generationally, savings rates remained flat or inched up over the past year in Empower’s sample set. Baby Boomers are saving the most at 10.2%, compared to Generation X at 8.2%, Millennials at 6.7% and Generation Z at 5.9%.

The gender savings gap is even more pronounced than the generation savings gap: According to the research, men’s average retirement saving account balances are 50% higher than women’s account balances.

Wage disparities between women and men, along with women taking on a disproportionate share of caregiving and childcare responsibilities, are among the reasons affecting the ability of women to save, according to Empower’s research.

Help Wanted

When it comes to asking for help with finances, about 47% of Americans see financial advisers as a trusted source, but only 30% actually used one in the prior year.

Empower noted a similar, but opposite relationship for people looking to social media for advice: While 18% said they use social media, only 9% see it as a trusted source.

After a financial adviser, retirement providers came in second as the most trusted source at 41% of respondents, with 34% saying they consulted a provider for guidance.

Going forward, the majority of those who took the survey plan to keep the course in 2024: two-thirds have no plans to sell assets or investments, and 69% do not plan to reduce their savings contributions.

The study included data from 5.3 million (primarily corporate 401(k)) DC workplace savers with Empower as the recordkeeper. The survey was conducted by FGS Global on behalf of Empower among full-time employees at for-profit companies with access to a DC plan offered by their employer. It was conducted in August, with a sample size of 2,511 working Americans between the ages of 18 and 70.