Hard times lead to hardship withdrawals from 401(k) plans

Tapping 401(k) retirement funds to meet expenses is a last resort for many investors, but the relentless economic downturn took its toll this year, as hardship withdrawals saw double-digit increases, according to record keepers. Hardship withdrawals among the 2.8 million participants in 1,500 plans served by Bank of America Merrill Lynch increased 23% year-to-date through Aug. 31, compared with the year-earlier period, said Kevin Crain, managing director of plan participant solutions at Bank of America Merrill Lynch, the institutional retirement, philanthropy and investments business unit at Bank of America. In addition, in-service withdrawals, used by employees who are still at their jobs and contributing to the plans, were up 27% through Aug. 31. Workers can pull money from their retirement plans for reasons of eviction, medical expenses or college tuition bills. However, there is a penalty and a tax unless they pay the money back by the end of the calendar year. In-service withdrawals may be also used for some of the same reasons. “I think the economy has had an impact on both categories,” said Kevin Crain, managing director of plan participant solutions at Bank of America Merrill Lynch. Still, he noted, the transactions are being made by only about 3% to 4% of total participants. Other record keepers also noted the trend. In data collected through May 31, hardship withdrawals increased by 18%, compared with a year earlier, reported Hewitt Associates Inc., a global human resources consulting firm that has a database of 2.7 million plan participants. By the end of 2008, hardship withdrawals already had increased 16% from the previous year, which marked the first time in a decade that that number increased significantly, said Catherine Brandt, spokeswoman for Hewitt. Going forward, the rate of withdrawals may be slowing down, Mr. Crain said. “People are getting more optimistic about the economy and saving more money,” he said. Still, for the month of August, hardship withdrawals were up 14%, compared with August of 2008 and in-service withdrawals were up 11%, he said.