This writer believes that most participants do in fact want to save for retirement and do a good job at it. The unfortunate reality for many, including yours truly, however, is that other financial challenges do get in the way. Whether an individual or family faces unexpected medical expenses, job loss, declining property values, natural disaster, or some other struggle, saving for retirement does not occur in a vacuum. Under ERISA, rules have been designed to be in the best interest of the participant. I once heard a simple explanation of some of the penalty provisions under the Tax Code - undoubtedly intended to be benevolent in nature, they provide penalties for distributions that are too early (pre-age-59 1/2), too late (post-age-70 1/2), too little (minimum distributions), or too much (excess distributions). Unfortunately, these benevolent remedies can make the challenges even harder.
A possible solution. What if instead of focusing on taxing early distributions, participants were enabled to both save more for retirement and have greater access to their money when financial challenges become front-and-center? Let's say you are annually deferring 6% of a $50,000 salary, or $3,000 (not including matching employer contributions nor investment results). You would like to contribute more, but economic uncertainty and other financial challenges are concerns. There is a lot of consolidation in your industry. If you knew that you could access your funds without penalty when a certifiable financial challenge occurs, this would encourage most people to contribute more to the 401(k) in the first place. Maybe instead of $3,000 a year, this same participant now contributes $6,000 or more. If the financial challenge never occurs, the participant will have given a tremendous boost to his or her account balance. If the financial emergency does occur, this will provide a resource for individuals without imposing on other taxpayers.
Here is a snapshot of this concept: