Retirement Plan Leakage: Why It Matters and How Employers Can Respond

As a small or midsize business owner, you’re likely aware of the growing emphasis on supporting employee financial wellness. It’s more than just a feel-good initiative. Financially stressed employees are often less productive, more prone to mistakes, and in some cases, at greater risk of engaging in fraudulent behavior.

One red flag that an employee may be facing financial hardship is retirement plan leakage. This occurs when employees withdraw funds from their retirement accounts — such as a 401(k) — before reaching retirement age for non-retirement reasons. If your company sponsors a qualified plan, it’s important to understand this issue and consider proactive steps to address it.

Why Leakage Is a Business Concern?

It’s easy to assume that what employees do with their retirement savings is their own concern. However, leakage can have real financial and operational implications for your business.

From an administrative standpoint, premature withdrawals can shrink plan assets and account balances. Since many plan fees are based on asset size or participant numbers, leakage can result in higher per-account costs and reduced efficiency.

Beyond plan expenses, early withdrawals often signal deeper financial instability among employees, which can translate into workplace issues. Employees struggling to manage finances may delay retirement, resulting in an aging workforce that is less engaged. Others might take on additional jobs, diverting their focus from their primary responsibilities. In some cases, financial desperation can increase the risk of internal fraud.

How Employers Can Help?

The most effective strategy for reducing leakage is education. Regularly communicate with employees about the long-term consequences of early withdrawals and the importance of preserving retirement savings. You can also provide financial literacy resources to help employees better manage budgets, debt, and emergency expenses.

In addition, recent legislation has opened up new options. The SECURE 2.0 Act introduced pension-linked emergency savings accounts (PLESAs) — a tool employers can offer through eligible retirement plans such as 401(k)s. PLESAs allow non–highly compensated employees to save for emergencies without tapping into their retirement funds, serving as a built-in safeguard.

Some businesses also create employer-backed emergency loan programs that employees repay via payroll deductions. Others review their retirement plan design to limit the availability of hardship withdrawals or loans, encouraging long-term savings discipline.

Take a Proactive Approach

Retirement plan leakage is a complex and often overlooked issue but one that can carry significant consequences for both employees and employers. While it may not be possible to prevent all leakage, raising awareness and offering support tools can greatly reduce its occurrence.

If you’re concerned about the impact of leakage on your retirement plan or looking for ways to enhance your benefits strategy, we’re here to help. As your CPA advisor, we can assess the cost implications and help you implement plan features that support financial wellness and reduce risk across your organization.