Chief Retirement Strategist
When the SECURE 2.0 Act was passed in 2022, authorizing in-plan provisions such as emergency savings and an employer match on student loan repayment, it underscored that financial wellness is inextricably linked to retirement readiness. But how, exactly?
So many financial factors influence a plan participant’s ability to save and reach a successful retirement outcome. Plan sponsors have struggled to understand those links and thus find it difficult to evaluate the benefits of including financial wellness considerations in their retirement plans.
The research collaboration between J.P. Morgan Asset Management and the Employee Benefit Research Institute (EBRI), which leveraged data across 29 million Chase households1 and 11 million 401(k) plan participant records, presents a new way of thinking about this critical – but still elusive – subject.
Spending spikes and retirement readiness
Our research aimed to measure financial well-being. As a proxy, we used a household’s ability to cope with the financial stress that accompanies hard-to-manage spikes in spending.
We identified the 35,000 households that had three contiguous years of both 401(k) and spending data from 2016-2020 and examined how often they encountered financial stress, measured in spending spikes. Over the three-year span, the spending spike was determined to take place in the second year. We then observed how that financial stress impacted their retirement savings and overall financial well-being. Among the questions we posed:
- How prepared are households to deal with spending spikes?
- How much does spending increase?
- How do households handle their spending spikes?
- What are the effects on 401(k) account balances?
We discovered that households with spending spikes generally have a precarious financial profile. Compared with households with no spending spikes, they have lower income, higher levels of credit card debt and a greater likelihood of taking out a 401(k) loan. We were surprised by the magnitude of the difference in retirement readiness between these households and those with stronger financial profiles.
Our research may offer a useful perspective for plan sponsors as they consider the benefits and potential structure of employee financial wellness programs. In particular, the findings document the connections between spending spikes, credit card debt and 401(k) plan participant behaviors. The research reaffirms the importance of focusing on actual participant behaviors and the potential for cash flow volatility in defined contribution plans.
Data definitions
First, we’ll define a few key terms.
Unfunded spending spike: A monthly unfunded spending spike is a spike at least 25% above the previous 12 months' median spending that cannot be funded by the household’s income and cash reserves in that month.
Separately, we discuss increases in spending that cannot be funded by the household’s income alone.
Credit card utilization ratio: Revolving credit card balance as a percentage of total available credit.
Spending ratio: Annual spending divided by annual net income.
How we conducted our research
Our research focused on those 401(k) plan participants who experience spending spikes (Exhibit 1). We examined how these participants fund the spending spikes through a 401(k) loan and/or credit cards. We also identified connections between credit card usage and the probability of taking out a 401(k) loan.
Key findings
Our research found that households with spending spikes tend to have a higher level of credit card usage, spend a higher percentage of their net income, and earn less income.
How prepared are households to deal with spending spikes?
Nine in 10 households encountered at least one spending spike in a given year that could not be covered by their current income. More than one in three households could not cover their increased spending with their current income and cash reserves.
How much does spending increase?
For three in four households with income under $150,000, a spending increase above $2,500 could not be funded by income alone. We focus on the $2,500 level in part because SECURE 2.0 sets $2,500 as the maximum emergency saving account balance for non-highly compensated employees.
J.P. Morgan’s Guide to Retirement examined spending spikes (referred to as shocks in the Guide) to determine recommended emergency savings. We found that for most participants, two to three months of net income in reserve would cover most spending spikes.
How are unfunded spikes handled?
Facing an unfunded spending spike, households appear to first increase their credit card debt and then take a 401(k) loan (Exhibit 2).
Among those participants who experienced an unfunded spending spike, 17% took a 401(k) plan loan compared with 7% of those without a spending spike – more than a 2x increase.
A household’s credit card utilization ratio plays an important role in determining whether a participant takes a plan loan. When less credit is available via a credit card, participants seemingly have no choice but to take a plan loan to meet expenses that cannot be covered by income and cash reserves. One statistic tells the story: The median credit card utilization ratio of participants taking a plan loan was 64% compared with 17% for those who did not take a plan loan (Exhibit 3).
Gauging the impact on retirement outcomes
Higher credit card utilization, commonly used to manage spending spikes, is associated with lower savings rates and balances in 401(k) plans, even when controlling for tenure and income (Exhibits 4 and 5). For example, for participants with tenures of more than 15 years and incomes between $75,000 and $100,000, the median 401(k) account balance is $184,000 for those with credit card ratios of 0%. For those with credit card ratios of 80%-100%, the median account balance is $80,000. In other words, the 401(k) account balances of participants with more prudent credit card utilization were more than 2x larger than those of their debt-burdened counterparts.
Key takeaways for plan sponsors
What are the key takeaways of our research for plan sponsors?
First, emergency savings is a necessity for everyone. Households without an adequate cash buffer take on debt, become financially more vulnerable and find themselves at risk of not achieving a successful retirement outcome. This key finding highlights the importance of financial wellness programs.
As we’ve noted, SECURE 2.0 allows plan sponsors to offer an emergency savings account inside a 401(k) plan, with a maximum account balance of $2,500 for non-highly compensated employees. Our research suggests that a maximum balance of $2,500 may be too low. But clearly, offering an in-plan emergency savings account, especially if it is paired with automatic enrollment, will encourage more employees to have at least some money set aside for unanticipated expenses.
We recommend that plan sponsors discuss with plan advisors and administrators the pros and cons of such an in-plan offering. But no one can reasonably debate the need for emergency savings. At a minimum, we think plan sponsors should consider offering employee education on the subject.
Second, participants who take a 401(k) loan are likely to be struggling with credit card debt. When a participant borrows from a 401(k), it can be a powerful signal to plan sponsors that offer financial wellness programs to engage on credit card debt management. Advice and education will be most relevant when that struggle is ongoing.
Finally, plan sponsors need to recognize and manage the impact of cash flow volatility within a plan. The cause of that volatility, “leakage” from plan accounts through 401(k) loans and withdrawals, can have outsized effects on retirement readiness. A focus on cash flow volatility is especially important as plan sponsors craft their Qualified Default Investment Alternative (QDIA) offering. We recommend that plan sponsors explicitly take participant behavior into account when defining criteria for their QDIA.
In short, what happens outside the plan – through participants’ spending and credit card usage – can exacerbate in-plan cash flow volatility and lead to less successful retirement outcomes.
Conclusion
Our research will likely resonate in different ways with different plan sponsors as they consider links between financial wellness and retirement readiness. Certainly, the subject is top of mind: In our 2025 plan sponsor survey, 83% of respondents said they felt a sense of responsibility for their employees’ financial wellness. Defining and measuring financial well-being has always been a mix of art and science. We think our research can help on both fronts.
1 This number represents the number of households we shared with EBRI to conduct the analysis. JPMorgan Chase Bank, N.A. (Chase) serves nearly half of America’s households with a broad range of financial services including checking, savings, investments, credit cards and loans. In this analysis, the Chase data sample is restricted to the households in 2016-2020 who use Chase as their primary banking institution, and their total household spending through all payment mechanisms (select credit and debit card transactions, electronic payment transactions, check and cash payments) and sources of income including wage income, Social Security, annuity, pensions, etc. can be linked to the EBRI/ICI Database. For more information about Chase, visit the following website: https://www.chase.com/digital/resources/about-chase.