Employers have long been at the forefront of efforts to improve Americans’ retirement security. It’s a tough challenge for many reasons.
One is that it’s difficult to convince Americans who do not feel financially secure today to think about financial security tomorrow. When people are worried about paying the bills, funding retirement is rarely a priority.
Financial wellness programs often consist of basic financial education like budgeting, saving and debt management that ultimately address the top issues associated with financial stress, such as:
- Lack of retirement savings,
- Student loan debt,
- Monthly rent payments, and
- Lack of an emergency fund.
The lack of an emergency fund can have an impact for many households. Common financial wisdom holds that households should have at least three months of income saved for emergencies. It’s an amount that can keep an individual or family financially afloat in the event a job is lost or unexpected expenses occur.
Some have questioned whether three months is too much. That is most likely not the case.
While losing a job isn’t a frequent occurrence, most Americans experience smaller, unexpected expenses with relative frequency, such as missing days at work, home repairs, car trouble, funeral or wedding travel, or medical emergencies.
Chart source: “Survey: Most Americans wouldn’t cover a $1k emergency with savings”. Bankrate.com.
Few American households, regardless of income level, meet the standard of saving three month’s income.
In 2017, the Federal Reserve reported 41% of U.S. adults could not easily pay a $400 expense. And, a January 2019 Bankrate Financial Security Index survey found 60% of respondents could not pay a $1,000 expense.
Potential Government Involvement
Citing some of these statistics, several members of Congress recently introduced The Saving for the Future Act.
Spearheaded by Senators Amy Klobuchar (D-MN) and Chris Coons (D-DE), this new legislation would require businesses with more than 10 employees to contribute at least 50 cents (increasing with time and wages) into an employee savings/retirement plan for every hour an employee worked.
The bill estimates that companies would contribute more than $1,000 per year into workers’ savings accounts.
Some of the other notable features of the bill include:
- Workers are automatically enrolled to contribute 4 percent of earnings,
- Minimum employer contribution rises to 60 cents per hour after two years,
- Tax credit is given for employers of up to 50 percent of minimum contributions,
- The first $2,500 goes into a savings account, with additional contributions going into a retirement account,
- Businesses with 10 employees or less can opt out, and
- Savings accounts are portable and worker-owned.
Though it is uncertain if this sweeping legislation will advance, it shows how far the emergency savings conversation has advanced in a short time, as well as the continued national interest in retirement readiness.
Consider a payroll deduction savings plan
As lawmakers have taken notice of Americans’ struggle with short-term savings, so to has the private financial sector.
Employers that already offer financial wellness to employees could easily add an emergency savings account option to their existing benefit suite.
Employers would be wise to consider making emergency savings a part of their financial wellness programs, as heightened financial anxiety has a negative effect on workplace productivity.
According to research from John Hancock, financial anxiety can cost employers as much as $2,000 per employee per year.
In 2018, the AARP reported that 71% of employees were likely to participate in an emergency savings program through work. Employees favored programs with the following features:
- Immediate access to savings, including prepaid card options,
- The ability to stop or modify amounts saved at any time,
- A portable account that remains with the employee, and
- Privacy so employers do not know account histories or balances.
Alternatively, employers could build an emergency savings option into their workplace retirement plans using after-tax 401k contributions or deemed Roth IRAs.
These options might allow automatic enrollment and matching contributions. However, plan sponsors would need to carefully consider issues related to:
- Liquidity, since emergency savings need to be readily available,
- Tax treatment of contributions, earnings and distributions,
- Viability of automatic enrollment and/or matching contributions,
- Non-discrimination and compliance issues, and
- Investment choices.
Emergency savings programs can help employers achieve one goal of many financial wellness programs: reducing financial stress. When employees have enough money set aside for unexpected expenses or emergencies, they will have greater financial confidence.
Lowering financial anxiety has benefits for employers, too. It can improve employees’ health, reduce absenteeism, decrease turnover rates and increase workplace satisfaction. In addition, meeting short-term savings goals can free employees to save for longer-term goals, like retirement.
Before retirement, Terry Dunne was the senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of consulting experience in the financial services industry. He has written extensively on retirement planning, industry trends, technology, and legislation. Millennium Trust performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.
