401(k)s are probably not the first thing that come to mind when imagining ‘trending’ topics. But over the past few weeks, they’ve received a LOT of attention – and some conflicting information. That’s because the CARES Act, passed back in March to alleviate some of the financial impacts of the COVID-19 pandemic, updated the rules around how your employees can borrow or withdraw from their retirement funds.
And while many Americans jumped on the chance to take advantage of the increased flexibility, there are a few things to consider before draining a retirement plan:
What did the CARES Act do?
First things first, let’s talk about what changed. Before the CARES Act, individuals were only allowed to withdraw up to $50,000 from their retirement accounts. In so doing, they were made to pay a 10% early withdrawal fee as a penalty and were required to pay income taxes on the withdrawn amount that year. Likewise, 401(k) loans were limited to just $50,000, with payments required at least quarterly over a maximum of 5 years.
Sounds great, right? Well, not so much. The severe pitfalls that come with taking money from your retirement savings did not change with the CARES Act.
Downsides of 401(k) Loans and Withdrawals
With the limit raised to $100,000, your employees may rush to this amount from their 401(k) to help cover day to day expenses or pay down other debts. However, consider that not only may this amount be more than the funds they truly need, but it will also take an incredibly long time to replace– even if the employee meets the yearly maximum 401(k) contribution of $19,500, it would take 5 years of maximum contributions just to replace that withdrawal.
At the same time, it is important to remember that most Americans do not contribute the maximum amount. In fact, when American workers take 401(k) loans, they often stop their regular contributions as they pay the loan back. This is compounded by the fact that some employers are currently halting their 401(k) match programs in an effort to keep the business afloat. Together, these decreases in regular contributions will make it that much harder to recoup retirement funds.
What’s more, taking any amount out of retirement funds, whether as a distribution or a loan, significantly impacts the investment’s growth potential. While 401(k)s are positioned to grow as markets improve over time, withdrawing now could mean a drastic cut to the total funds that could’ve been saved by the time your employee is ready for retirement. Consider this example from Vanguard: Taking out even just $10,000 now means you are forgoing what could grow to $57,435 in 30 years.
401(k) loans are not always a bad thing, though. When used to pay for an asset that also has potential to appreciate in value, such as purchasing a home, they can serve as a smart way to shift funds from the stock market to real estate and help achieve your employees’ financial goals. But taking savings out now to cover day to day expenses may make it much harder for your employees to rely on the 401k account as a funding source when it comes time to make those bigger investments down the road.
Finally, bear in mind that the CARES Act adjustments only apply to individuals who have been directly impacted by COVID-19, which may make these loans or withdrawals harder to get than they seem.
Ok, so what are the alternatives?
So, where can your employees turn when they need emergency funding? Kashable is an employee benefit program that offers American workers access to low-cost personal loans. Unlike with the CARES Act, a Kashable loan can be taken at any time to help cover any personal financial need, like unexpected expenses or paying down other high-interest debt.
Because we leverage employment data in our underwriting process, Kashable can offer loans of $250-$20,000 to individuals across the credit and wage spectrum. We manage the entire loan process from start to finish, so there is no risk and no cost to the employer.
With seamless repayment through payroll, we help ensure that employees stay on track with their financial goals, even amid times of hardship or uncertainty. Plus, we are able to integrate with your existing benefits systems, making Kashable a quick and efficient way to offer your employees a financial safety net when they need it most.
Learn more about how Kashable can provide immediate relief for your team when you Book a Demo.