How to prevent employees from raiding their retirement funds

Despite record numbers of Americans now holding retirement accounts, less than a third of savers say that those savings are on track. To make matters worse, almost half of households tapped their nest egg this year to cover household costs that have increased from inflation. For large swaths of the American population, a secure, well-funded retirement is an increasingly challenging goal — underscoring a critical vulnerability in our nation's financial health.

This isn't just a personal problem: it's affecting companies, too. The stress of financial insecurity can impact job satisfaction, workplace morale and productivity. Ensuring that employees have robust financial plans that allow savers to let their retirement funds flourish is an increasingly important concern for companies.

Betterment's annual retail investor survey found that 88% of investors working with a financial adviser have an emergency fund compared to just 56% of those without an adviser. These advisers – and the employers with whom they work – are playing a vital role in helping individuals both to build emergency funds and avoid the need to dip into their retirement savings. Here's how they're doing it:

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Every person's financial situation is unique; the financial advice offered to them should be similarly personalized to ensure it meets their needs. By providing access to bespoke financial planning services, employers can empower their staff to take control of their finances and implement tailored strategies that can help prevent the need for premature withdrawals. 

Strategies will differ depending on their circumstances, but there are a few sensible steps that can be taken. They include developing robust emergency savings, prioritizing high interest debt repayments, and optimizing savings and investment strategies that can withstand economic turbulence.

The benefits of working with a financial adviser are increasingly clear: research suggests that people who are guided by advisers score significantly higher on retirement income literacy tests and suffer considerably lower financial anxiety. 

Some workers can be lukewarm about contributing to a retirement plan, feeling that the numbers just simply don't add up. The importance of starting small and early cannot be overestimated, as the sooner their savings can begin to grow, the less likely retirement savers may be to withdraw from them.

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Offering a 401(k) match is an effective way to support employees in their retirement savings journey. This benefits both employer and employee. Providing solid retirement support will help position the organization as an attractive employer, which can boost their recruitment efforts and improve employee retention.

One of the biggest financial burdens holding back savers, especially younger generations, is the enormity of their student loan debt. Gen Z's average student loan debt is more than 10% higher than their previous generation's debt, while the overall outstanding student loan debt has quadrupled over the past two decades. Despite political efforts to reduce the burden of student debt, this problem is only increasing.

Thanks to a new provision within the SECURE Act 2.0, this is one area in which advisers and employers can play a crucial role. Employers can now match employees' student loan payments with company match contributions to their 401(k)accounts, allowing savers to reduce their student loan debt while simultaneously saving for retirement. Again, this doesn't just benefit the employee; offering student debt repayment assistance also can help employers to attract and retain employees. 

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The best way to avoid tapping into a 401(k) is to have emergency savings outside of the retirement account. While this may be a luxury to some, careful planning can help even those with the tightest of budgets to set aside money for unforeseen expenses. Savings that can be used in times of need will not only provide ease of mind, but will enable employees to handle unexpected shocks without jeopardizing their long-term retirement goals.

It's advisable to have a fund that covers six months' worth of expenses. If this sounds daunting, consider that nearly half of Americans cannot afford to pay a $1,000 emergency expense from their savings. Over a third of Americans could not cover a $400 expense with cash, having to instead rely on credit cards, borrowing from friends or selling possessions.

But by setting aside a few dollars every paycheck – perhaps even through an automated transfer from an individual's checking account – employees can slowly build a fund that will cover at least some of their emergency expenses. It is worthwhile for people to cut back on discretionary spending while building this fund and treating it as their No. 1 priority.

By providing personalized financial advice, offering matching retirement contributions and supporting employees with student loans and emergency funds, employers can help to nip this trend in the bud and work to enhance their staff's financial and mental well-being. 

These measures can not only improve employees' financial health but also boost morale, recruitment and retention, making companies more desirable places to work.