CNN has a story about hardship withdrawals from 401(k) plans reaching the highest level in 10 years during the second quarter of 2010. Fidelity Investments, which manages $844 billion in retirement funds, disclosed that, as of the second quarter, 2.2% of 401(k) participants had made hardship withdrawals over the past 12 months.
I’m not sure how many inferences you can draw from a rise in hardship withdrawals, but the increase clearly is not good news. Anyone who takes a hardship withdrawal is not simply raiding their retirement fund and thereby decreasing their retirement security. Hardship withdrawals also come an an enormous price — by some accounts, up to 40 percent of the amount withdrawn — because federal and state taxes are levied on the amount and a 10 percent penalty is imposed as well. If you assume that people tend to behave rationally when it comes to their finances, then you have to conclude that anyone who would take a hardship withdrawal from their 401(k) plan must be desperate and have no other options.
One of the individuals quoted in the article linked above noted that 2.2% is a relatively small percentage and that the vast majority of 401(k) participants therefore are not taking hardship withdrawals. That is of course true, but it also is likely true that people who have 401(k) plans with sufficient funds to be the subject of hardship withdrawals are the most prudent, careful savers. (Although it is not clear how many people have saved for retirement, recent surveys indicate that 27 percent of Americans have saved less than $1,000 and less than half of Americans have more than $25,000 saved to fund their retirement years. If you have less than $1,000, you probably aren’t going to take a hardship withdrawal because, even if you withdrew your entire fund, the amount left for you to use after taxes and penalties would be negligible.)
If even the most careful savers are so desperate that they need to take hardship withdrawals, rather than reducing their annual contributions or taking a loan from their saved amount, it indicates that times are tough, indeed.