401(k) hardship withdrawals hit record 6% as emergency savings run dry

A record 6 percent of retirement plan participants took 401(k) hardship withdrawals in 2025, up from 5 percent, even as balances climbed 13 percent and participation hit 86 percent, according to Vanguard.

"We have danger more than we've had before, because it's the workers that we know have a job, they have a paycheck coming in, and they are still not making it," said Suze Orman, personal finance expert and co-founder of SecureSave, a provider of workplace emergency savings accounts.

The median hardship withdrawal last year was about $1,900, with the two most common reasons being to stop a foreclosure or eviction and to cover a medical bill, according to Vanguard's How America Saves report. The share of Vanguard defined contribution plan participants taking hardship withdrawals has tripled from 2 percent in 2020. Worker confidence in retiring comfortably fell six points in a single year to 61 percent, the lowest since 2017, according to the Employee Benefit Research Institute.

The trend reflects a broader squeeze on household balance sheets. Total household debt reached $18.8 trillion in the second quarter, up $4.6 trillion since the end of 2019, while credit card balances climbed to $1.26 trillion — near the all-time high of $1.28 trillion set in the fourth quarter of 2025. More than half of workers — 55 percent — cannot cover a $500 emergency expense, according to a SecureSave survey of 1,028 workers conducted in June.

The early withdrawal is a symptom, not the cause, of household financial fragility. Fewer than three in five workers say they could handle an emergency expense, and 65 percent say debt is a problem in their household, according to EBRI. The Federal Reserve's 2025 report on the economic well-being of U.S. households found that 63 percent of adults could cover a $400 emergency expense via cash, savings or a credit card paid off at the next statement — unchanged for three years after peaking at 68 percent in 2021. Part of the increase in hardship withdrawals is mechanical: a 2018 rule change removed a required step, reducing paperwork and friction. But the underlying driver is that paychecks no longer stretch as far as retirement plan assumptions expected.

Secure 2.0 opens new emergency savings paths

Congress's Secure 2.0 law, passed in 2022, aimed to help employers encourage emergency savings. Participants in defined contribution plans may withdraw up to $1,000 per calendar year for emergency expenses without penalties, though that sum generally must be repaid before additional emergency withdrawals within three years. The law also allows automatic enrollment of workers into pension-linked emergency savings accounts, or PLESAs, with annual contributions up to $2,600 for 2026, withdrawable free of taxes and penalties.

Adoption has been slow. Just 4 percent of 401(k) plans allow the $1,000 emergency withdrawals, according to Vanguard. PLESAs "really haven't gone anywhere" due to the time taken for regulations and record keepers to develop the benefit, said Craig Copeland, director of wealth benefits research at EBRI. T. Rowe Price announced in April 2025 it was the first to launch PLESAs.

Workplace emergency savings accounts separate from retirement plans have gained more traction, including offerings from SecureSave, Sunny Day Fund, Fidelity and BlackRock. For employers, emergency savings can be an inexpensive benefit to provide, particularly if they are just facilitating the payroll deduction, Copeland said.

Congress weighs expanding PLESA limits to $5,000

Policymakers are pushing to expand these tools. The bipartisan Emergency Savings Enhancement Act would raise the maximum annual PLESA contribution to $5,000 and expand eligibility to employees who meet retirement plan requirements, including highly compensated employees — those earning more than $160,000 in 2026, per the IRS. The bill recently advanced out of the Senate Committee on Health, Education, Labor and Pensions.

Akabas said Secure 2.0's biggest impact was drawing attention to Americans' emergency savings shortfall. "A primary solution to that is finding tools to help employees save for emergencies," he said.

The distinction between retirement readiness and financial security is central to the challenge. A growing retirement account balance is a promise about a life decades away; it tells nothing about the next 30 days. The gap between this paycheck and the next surprise is where the fragility lives — and that gap never appears on quarterly retirement statements. For workers eyeing their 401(k) in a hard month, the question is not about discipline but about what stands between them and the next emergency that isn't their retirement account. A small, separate emergency fund — built however it gets built — is often all that separates an unexpected bill from a withdrawal.

This article is for informational purposes only and does not constitute professional advice; readers should verify all figures against the latest official announcements.