I think the recognition of the need to focus on both short-term and long-term financial stability is very valuable in the discussion of how to resolve the shortfalls in retirement savings. In too many cases, it seems that the focus has been more of an "either/or" choice. In other words, telling people that they need to save more for retirement is all well and good, but there has to be recognition that this effort does not occur in a vacuum. There are many short-term challenges as well.
I recently posted a blog entry that would retool this provision to instead both encourage retirement savings and be available for short-term financial challenges. One thought that I keep coming back to is what if there were a way to contribute more to a 401(k) plan and have better access to the funds to meet those short-term financial challenges. As it now stands, the 10% early distribution penalty punishes individuals just at the time of financial difficulty, rather than encouraging them to get back on their feet. When it was enacted, it was most likely well-intended as a way to ensure that money intended for retirement is in fact available for retirement. The problem is that for many people, financial challenges might not await retirement - the "rainy day" is more immediate. The gist of the idea is that if participants who potentially will have financial stress know that if they contribute more to their 401(k), but will also have access to the funds in a financial emergency without penalty, while also being encouraged to "pay it forward" as they return to a better financial state, then this will increase retirement readiness and give peace of mind to those who are addressing both short-term and long-term needs.