HR People, Credit Counselors, and Bankruptcy Attorneys – Am I Correct about Emergency 401(k) Withdrawals?

One of my (many) favorite quotes is, “Learn from the mistakes of others. You can’t live long enough to make them all yourself.” [1]
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Over the decades I’ve certainly made my share of mistakes!  But during five years as a community college personal finance instructor, and as counselor with several thousand in-person sessions under my belt (including 1,000 or so for bankruptcy), I’ve also had uncommon opportunities to learn from the mistakes of others.
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Certainly there are health emergencies or sudden and extreme reductions in income (sometimes both) that necessitate an in-service hardship withdrawal from a defined contribution plan.
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My observation is that a more common scenario involves not an isolated financial event, rather a multi-year pattern of deficit spending.  In other words, Americans – month after month and year after year – spend more than they earn.
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Let’s say that you have 200 employees participating in a retirement plan, and over a 12-month period eight of them make an emergency withdrawal of, say, $10,000.  Two of these individuals later learn that the cash influx provided emotional relief only for the moment, but the core financial behaviors were unchanged and later file for bankruptcy protection.
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So $20,000 that might have been protected in bankruptcy is gone forever.
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SHRM, NFCC, FCAA, NACBA members – has this been your experience?  How much does this affect the future value of an individual’s savings?
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[1] Contributed anonymously to a 1948 The Weekly Underwriter; later attributed to Martin Vanbee, Eleanor Roosevelt, and others.

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