A new report from the BlackRock Emergency Savings Initiative (ESI) emphasizes a finding many in the retirement space have been pushing—that emergency savings and retirement readiness are inextricably connected.
The Impact and Learnings Report studied the close connection between both savings initiatives, finding that effects to short-term savings can, and will, eventually impact long-term finances.
In its report, BlackRock notes how emergency savings can act as a barrier against early retirement withdrawals. Additional research from the Emergency Savings Institute, with the Defined Contribution Institutional Investment Association Retirement Research Center (DCIAA RRC), found that during the COVID-19 pandemic, low-income households with at least $1,000 in emergency savings were half as likely to withdraw from their workplace retirement savings account. If an individual were to have a rainy-day fund available during emergencies or a crisis, it’s unlikely they would utilize their retirement savings as a cushion instead, BlackRock found.
Additionally, the research from DCIAA RRC showed those with “significant” emergency savings were half as likely to withdraw from their retirement, and in fact, were 70% likelier to contribute to a defined contribution (DC) retirement plan.
The report included case studies from past partnerships with several organizations, further underscoring the finding that introducing emergency savings features could inadvertently spotlight retirement planning. One partnership between ESI and shipping and parcel service UPS found that emergency savings options had a positive effect on retirement savings for some workers. “Employees who increased their after-tax contribution rate were about twice as likely to also have increased their pre-tax contribution rate than those who made no changes,” established the report.
Further research from ESI partner Voya reported that participants with scarce short-term funds were 13 times more likely to take a hardship withdrawal than those with sufficient savings.
Findings from the studies showed that participants are placing even more value on financial wellness benefits, as market volatility and economic uncertainty heighten fears of an impending recession. Another study from Commonwealth and SaverLife discovered that close to a third of individuals said they would either start contributing or contribute more to a workplace retirement account if it was paired with an emergency savings option, even as 58% of the bottom quarter of earners surveyed did not have access to retirement plans.
Offering an in-plan after tax option, as well as out-of-plan options, could potentially ensure more employees are saving for the short-term, ESI research reported.
Increasing emergency savings adoption
The ESI report found three leads to encourage short-term savings, such as adding an opt-out intervention, in-product features, and targeting new users.
Interventions that were opt-out, perceived opt-out, or required savings had a median uptake rate that was four times higher (43%) than if employees had to proactively take action to start saving (10%).
Interventions that changed or amended an in-product sign-up flow to encourage savings, like re-ordering onboarding screens or adding a savings questionnaire, saw increased median uptake rates (39%) compared with interventions that relied exclusively on email campaigns (7%), reported the ESI.
Interventions aimed at new employees or members had higher median uptake rates, at 39%, than projects that targeted existing employees or members, at 8%. The ESI report attributes this to new users “who may be less habituated, are at a prime moment for starting a new behavior and are more easily presented with an opt-out, perceived opt-out, or required savings prompt,” like employee onboarding or new products/account opening.
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