The COVID-19 pandemic has thrown a spotlight on a problem that already existed, and one 401k advisors are well too familiar with: A lack of emergency savings, which throws a big old roadblock into an employee’s ability to contribute to a 401k.
According to LIMRA research, 14% of consumers say they have lost their job due to COVID-19 and 32% are earning less because their hours or pay were reduced. Almost half (45%) of workers indicate the pandemic’s economic downturn has negatively affected their retirement savings and 56% are worried about the long-term impact the pandemic will have on their financial security.
The pandemic, however, is just exacerbating the emergency savings crisis. Almost one in four Americans have no money set aside for emergencies and another 26% have less than three months of emergency savings.
Over the past several years—well before the pandemic—four in 10 Americans have expressed concern about paying their monthly bills and nearly six in 10 worried about being able to save for emergencies.
Emergency savings represent the first line of defense for households experiencing a financial shock such as major unexpected expenses or the loss of a job. All of LIMRA’s data suggest that Americans could use some help.
Employers to the rescue?
LIMRA reports that employer interest in offering emergency saving vehicles is on the rise, and other recent research has shown employees want the help. The pandemic has prompted more companies to express interest in offering financial wellness support and taking specific action to offer emergency savings resources.
Nearly two-thirds of employers are somewhat or very interested in offering employees access to an emergency savings account. Also, three in 10 defined contribution (DC) plan advisors would like to see recordkeepers offer workplace emergency savings alongside retirement plan recordkeeping.
There are a few different approaches to the emergency savings gap:
- Use an in-plan option. This approach supplements an existing workplace retirement plan, and it is intended to prevent employees from dipping into their actual retirement savings. Employees designate a percentage of their paycheck towards an emergency savings account within their DC plan.
- Add a “sidecar” solution. Employers offer a program separate from their DC plan to enable their workers to save for emergencies.
- Take it online. There are apps—like Twine, Acorns, and Qaptial—specifically built to help consumers improve their savings habits.
- Turn to insurance. One less formal (and also likely not well-known) option is to tap into a whole life policy. For people who own this product and have a cash balance, they are able to access those funds during difficult financial circumstances.
One thing is certain; COVID-19 has highlighted how precarious life can be. It also underscored the need to help Americans prepare financially for the unexpected. The good news is LIMRA research finds more than six in 10 workers are interested in a workplace emergency savings account. Innovation in this area can help create more stability today and a more certain tomorrow for employers, their employees, and families across America.
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