Well over half of U.S. employers use 401(k)s and other defined contribution plans to encourage their employees to save for retirement, collectively spending more than $118 billion in match contributions and encouraging employees to save another $175 billion every year, according to a January 2013 report, "The Retirement Breach in Defined Contribution Plans: Size, Causes and Solutions."
Yet, more than 25% of households that use a defined contribution plan for retirement savings have withdrawn, or breached, some or all of their plan balance for nonretirement spending needs, amounting to more than $70 billion withdrawn in 2010, the most recent year for which the relevant Federal Reserve and IRS data were available, according to the report by financial advisory firm HelloWallet.
Of that breached $70 billion, nearly $60 billion was subject to income taxes and IRS early-withdrawal penalties, while the other $10 billion included new loan originations that risk being taxed and penalized if not eventually repaid.
In general, when employees take a distribution from a traditional 401(k) or other non-Roth defined contribution plan before age 59½, they are subject to a 10% penalty, in addition to owing income taxes on the amount withdrawn (see “Loans vs. Hardship Withdrawals” below).
Moreover, the value of penalized breaches has increased over time, growing from about $36 billion in 2004 to nearly $60 billion in 2010, according to the report, which also noted that: