There’s been a flood of information recently about Americans’ emergency savings—or perhaps more accurately, their lack thereof.
This issue has been making headlines—including a recent Wall Street Journal article and a new study from the Employee Benefit Research Institute (EBRI)—and has attracted the attention of employers who are increasingly incorporating plans to boost employee emergency savings as part of their burgeoning financial wellness platforms.
The emergency savings issue also deserves a look from 401k-focused advisors, as it can potentially impact the ability of plan participants to save—more or less—in their 401k.
If, as the Wall Street Journal article implies, the idea is to provide employees with the tools to cover emergencies or pay down debt while forestalling runs on retirement accounts, helping employees meet immediate liquidity needs may mean they end up making smaller contributions to their 401k—at least in the short term.
At the heart of the issue, for employers anyway, is employee productivity. If an employee can’t cover an unexpected expense such as a sizable car repair bill, they might miss work and are likely suffering from financial stress that can negatively impact productivity.
Because of this, employers are increasingly turning to financial wellness programs to provide assistance with financial literacy, student loan debt repayment, saving for retirement, and increasingly, to help them build an emergency fund. Without an emergency fund, after all, most workers are in no position to be able to contribute to a 401k. The sooner they can get on sound financial footing, the sooner they can begin contributing in earnest to that 401k.
The emergency of emergency funds
There is no shortage of studies that shine a light on Americans’ lack of emergency savings:
- A recent Bankrate survey found that if faced with a $1,000 unplanned expense—like a trip to the emergency room or a car repair—only 4 in 10 (41%) would be able to cover the unexpected cost using savings.
- According to the Federal Reserve, half of American families report having an emergency fund, and only 20% of American families had access to liquid savings of more than three months of their family income in the case of an emergency. The Federal Reserve also found that 40% of American adults can’t afford a $400 emergency expense such as a car repair or replacing a broken appliance.
- John Hancock’s most recent Financial Stress Survey showed a quarter of respondents had no emergency savings at all.
The establishment of an emergency savings fund to protect against financial emergencies is considered to be critical to overall financial health. This is one of the reasons EBRI tackled the issue in a recent issue brief, which found that 44% of employers interested in providing financial wellness programs “offer or plan to offer” an emergency fund/employee hardship assistance.
These employers focused on an emergency fund are more likely than employers overall to “have taken steps to understand their employees’ financial wellness needs.” They also are more likely to favor education-based financial wellbeing and debt assistance benefits (43% vs. 36%). Employers cite improved employee satisfaction and productivity as success measures for their efforts, though EBRI cautions that “measuring the impact of these initiatives can be challenging.”
John Hancock adds emergency savings accounts
Just this week, John Hancock announced it was expanding its financial wellness offering to include emergency savings accounts (as well as comprehensive college planning tools).
“If people are able to manage and prioritize their day-to-day expenses, they are also better able to allocate money toward their retirement savings,” said Patrick Murphy, CEO, John Hancock Retirement. “If we can help build participants’ savvy and confidence, we are in a much better place to help build a successful retirement savings strategy.”
Now, with the click of a button on John Hancock Retirement’s participant site—where they may already be in a long-term savings mindset—participants can create an emergency savings account. Once a savings goal is entered, the participant links their checking account and sets up weekly recurring deposits. Participants can track progress toward the savings goal and are able to withdraw funds at any time with no fees.
This can help participants prepare for unexpected financial needs and may prevent them from tapping into their retirement account.
“Everyone’s journey to retirement readiness is different,” said Sosseh Malkhassian, head of participant experience, John Hancock Retirement. “By offering resources that are easy to access and use, we’re making it easier for our participants to make well-informed decisions, manage multiple priorities and take action in their financial lives. And that sets them up to build and meet long-term retirement readiness goals.”
Prudential partners with GreenPath
Earlier this month, Prudential announced it is partnering with national nonprofit GreenPath Financial Wellness to introduce debt management advice and tools to its suite of workplace financial wellness solutions.
Prudential said in a statement it is continually looking to offer solutions such as emergency savings and student loan assistance tools to workplace clients to help employees and association members manage their finances.
“It’s difficult to save for emergencies and invest in retirement when you feel crippled by debt. Debt also contributes to financial stress and negatively impacts workforce productivity,” said Vishal Jain, head of financial wellness strategy and development at Prudential Financial. “Helping individuals minimize the impact of debt is an important expansion of our financial wellness efforts.”
GreenPath offers a free session with a certified financial counselor to establish goals and explore debt repayment options. For a fee, employees or members who participate can also choose to enroll in a formal debt management plan designed to pay off outstanding balances in five years or less.
Nine organizations, including Prudential, have committed to the service. It will be available to all institutional employers in the second half of 2020.
Prudential noted its in-plan emergency savings tool uses after-tax contributions to build savings for unexpected expenses, creating a convenient way to save for both retirement and short-term needs.”
Sidecars and hardships
Emergency savings funds with financial wellness programs can be either a stand-alone account or a so-called “sidecar” account linked to the employee’s retirement plan. With both account types, employees choose a payroll deduction for each pay period. The cash can be accessed at any time, and some employers may offer a match.
As the WSJ article points out, the benefit of a sidecar is once it hits a certain threshold, any overage goes into the linked retirement account. If the individual taps the sidecar for cash, it is automatically refilled via the next payroll deduction.
Without emergency savings, many people who already have a 401k that experience an unexpected financial challenge turn to either loans or hardship withdrawals from their 401ks.
Since the Bipartisan Budget Act of 2018 eliminated the requirement to take all available plan loans before obtaining a hardship withdrawal, the folks at Fidelity Investments have been keeping an eye on how this change might impact participant behavior.
What they’ve seen so far? While the percentage of participants taking loans and hardship withdrawals has remained relatively consistent, there has been a slight decrease in the percentage of participants taking loans, and a slight increase in the percentage of participants taking hardships since passage of the BBA.
Participants taking hardship withdrawals spiked to 4.4% in 2019, compared to 2.7% in 2017, according to a Fidelity Whitepaper on the topic. Loans remained consistent at 9.2% in 2017 and 2019. The average hardship withdrawal was $3,800 as of the end of September 2019.
The Fidelity paper notes taking a loan will have less of an impact on participants’ long-term savings and is generally a better option than taking a hardship. While both loans and hardship withdrawals are leading causes of 401k leakage, at least loans are expected to be paid back while participants have no obligation to pay back a hardship withdrawal.
Hardship withdrawals do come with an income tax payment as well as a 10% penalty for those under age 59½.
For some participants, taking a hardship may be their most realistic option and the only thing that can keep them from a severe consequence such as losing their home.
To help participants who are in an expected or unexpected financial crisis, the Fidelity paper says plan sponsors should consider hardship withdrawal processes that allow for quick and streamlined access to assets.
SEE ALSO:
- EBRI Finds Emergency Fund Assistance High on Employers’ Priority List
- How to Resist 401k Hardship Withdrawals
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
