More Americans are tapping their 401(k) accounts because of financial distress, according to Bank of America data released Tuesday.
The number of people who made a hardship withdrawal during the second quarter surged from the first three months of the year to 15,950, an increase of 36% from the second quarter of 2022, according to Bank of America’s analysis of clients’ employee benefits programs, which are comprised of more than 4 million plan participants.
It’s a “pretty troubling” development if more people are resorting to making hardship withdrawals, Matt Schulz, chief credit analyst at LendingTree, told CNN.
“You understand why people do that in the heat of the moment, but the opportunity costs on that are really, really high over time,” he said.
Bank of America’s latest Participant Pulse report also found that a greater percentage of participants borrowed from their workplace plans from the first quarter, and average contributions trailed off as well.
However, overall employee contributions continued to hold steady for the first half of the year, and a greater share of participants upped their contribution rate than decreased it.
“The data from our report tells two stories — one of balance growth, optimism from younger employees and maintaining contributions, contrasted with a trend of increased plan withdrawals,” Lorna Sabbia, head of retirement and personal wealth solutions at Bank of America, said in a statement. “This year, more employees are understandably prioritizing short-term expenses over long-term saving.”
While the labor market remains strong, the economy is growing and consumers are spending, the global pandemic followed by two years of persistently high inflation have taken their toll on household finances.
Since 2019, household debt balances have increased by nearly $3 trillion, according to New York Federal Reserve data through the first quarter of 2023.
Separately on Tuesday, the New York Fed reported that US households’ credit card debt surpassed the $1 trillion mark for the first time ever. The $45 billion increase in credit card debt helped to drive overall household debt levels to $17.06 trillion at the end of the second quarter.
“There’s only so much hard debt that people can handle before delinquencies really spike,” Schulz said. “Ultimately, you just have a lot of people who are doing OK now, but it wouldn’t take a whole lot for them to find themselves in a pretty sticky situation financially, whether that is a medical emergency, job loss, or even just student loan payments restarting.”
Federal student loan payments are set to resume in October following a more than three-year pause due to the Covid-19 pandemic and the Biden Administration’s push to forgive debt.
