When participants make the short-term decision to borrow from their retirement savings account, there is a significant chance their long-term savings will be less than participants’ typical average, according to retirement experts from T. Rowe Price who recently looked at the effects of retirement loans and hardship withdrawals on long-term savings.

Access to emergency savings accounts made headlines during the COVID-19 pandemic, as widespread and sometimes immediate job loss rippled through the country. In the retirement space, an emergency account tied to a retirement plan that can be accessed easily and without charge (up to a limit) has continued to be a hot topic of discussion, in part due to such accounts’ inclusion in the SECURE 2.0 Act of 2022. Delta Air Lines, which announced in July a $1,000 emergency savings account contribution to employees who take a financial training session, reported that more than 33,000 employees have enrolled in the program.

But more broadly, uptake and interest continue to be uncertain as advisers and plan sponsors deal with more immediate SECURE 2.0 mandates. Only 25% of plan sponsors offer an emergency savings account, according to Buck Global LLC, though another 25% are planning to in the future.

Rowe research suggests that giving people access to an emergency account that keeps them from tapping their tax-protected retirement savings may in fact lead to better long-term retirement security outcomes, according to Rachel Weker, a vice president, senior strategist and co-author of the report.

“The premise we started with was, ‘Are all loans created equal?’” says Weker. “What we found is that when we looked at the data, there is a population of participants who are taking repeated, small loans, and if you looked at their savings rates versus the average participant’s savings rate, there is a pretty significant difference.”

On average, participants who borrowed multiple times from their retirement plan accounts had a lower savings rate, by 2.3 percentage points, than those who did not borrow or rarely borrowed. The more loans people took, the worse their long-term outcomes.

Similar results were found for hardship withdrawals. Savers nearing retirement who had not taken a hardship distribution had, on average, three times more in savings than their counterparts who had taken hardship withdrawals, according to T. Rowe.

“The analysis helped us zero in on the fact that there appears to be a very direct connection between someone who is needing to tap their retirement savings plan and their ability to save for retirement,” Weker says.

An emergency savings account tied to a retirement plan, Weker says, is one way plan advisers and sponsors can help combat this issue through retirement plan design.

“I think this helps thread the needle for plan sponsors and advisers to help them see that connection to retirement outcomes—which really answers the question, ‘Why should I be trying to solve for emergency savings within the context of my retirement plan?’” she says. “This shows you that if you don’t, your participants aren’t as likely to achieve success.”

Weker notes that, at T. Rowe, there is a financial wellness tool that activates for participants who are looking to make changes to their retirement plans. Through targeted videos, she says, participants get information at the point of action that can help them consider the long-term impact on their savings and goals.

“You can see that there is a significant impact to people’s likelihood of taking action if they receive information at the point of which they are making decisions,” she says.

According to separate T. Rowe surveying of Americans, 14% of respondents said they were likely to tap into workplace retirement accounts to cover emergency savings. Meanwhile, 55% of those surveyed said they are not saving enough for retirement, and 62% indicated that they were saving all they could afford to while still meeting daily expenses.

Weker notes that, according to T. Rowe’s data, retirement saving loans are not just taken by younger participants; they actually increase in use as people get older and their needs “grow more complex.” By addressing short-term needs sooner, these later-in-life decisions may not have as direct an impact on retirement savings, she notes.

“I do think there is an appetite for individuals to figure out how to manage these competing goals,” she says. “People will say they can’t save more for retirement because they’re saving all they have or [because,] ‘I have other goals,’ like establishing an emergency savings fund. There’s a recognition that, ‘I know I need to do these things, but I need help figuring out how to do that.’”

T.Rowe Price’s 2022 Retirement Savings and Spending Study was conducted by NMG Consulting between June 24 and July 22. It included 3,895 401(k) participants who are currently 18 years are older, full‑time or part‑time workers who have never retired and either contribute to a 401(k) plan or are eligible to contribute and have a balance of at least $1,000. The survey also included 1,136 retirees who have retired with a rollover IRA or left‑in‑plan 401(k) balance.