As the House of Representatives races to approve the $1.7 trillion omnibus spending bill containing the SECURE 2.0 Act of 2022 before the Saturday deadline, plan sponsors and employees are eager to utilize several of the provisions included in the legislation. One of the most sought out provisions would help Americans set aside money for emergency expenses.
The Emergency Savings Act and the Enhancing Emergency and Retirement Savings Act are two provisions within SECURE 2.0 that would make it easier for employees to set aside funds for unexpected emergencies. The former would automatically enroll employees to save $2,500 in a separate emergency savings account associated with a 401k plan, while the latter would give employees additional flexibility and penalty-free access to withdraw up to $1,000 from their retirement savings to cover for emergencies. In this case, the borrower would need to replace the funds within three years before making another withdrawal to their accounts.
Timothy Flacke, co-founder and executive director of Commonwealth, applauded the bills for heightening awareness with emergency savings, and acknowledging the importance these funds can be for unforeseen circumstances.
“The emergency savings provisions are significant in the fact that Congress has done three vital things: validated that emergency savings matters, belongs in the retirement system, and should include an option for automatic enrollment and be eligible for employer matches,” he said.
“Specifically with this action, employers can now automatically enroll employees in emergency savings options that are associated with their 401(k), and employees will have new ways to respond to unexpected expenses without penalty.”
The emergency savings provisions can make a sizable difference for employees who have not been able to save, either because of the COVID-19 pandemic, little income, inflation, or all three. At the height of the pandemic, employees who lost their jobs, earned less, or were simply keeping their head afloat could not afford to add to their emergency savings. LIMRA research in 2020 found that almost one in four Americans has no money set aside for emergencies, and another 26% had less than three months of emergency savings.
Now, as rumors of an impending 2023 recession circulate, employers can play a key role in workers’ financial security, Flacke said. Nearly a quarter of workers currently have no savings set aside for emergencies, according to the Consumer Financial Protection Bureau (CFPB), and a survey by TalentLMS, Enrich, and Tapcheck on financial wellness found 78% of respondents say they need support from their employers on financial matters.
This is especially true for low- and moderate-income workers, who are much likelier to experience financial insecurity. In addition to what the emergency savings provisions provide, enabling well-designed, research-backed, employer-sponsored savings vehicles may help increase the emergency savings of employees earning lower incomes, Flacke said.
Research conducted by BlackRock’s Emergency Savings Initiative, in conjunction with Commonwealth, has found what we all know: emergency savings is inextricably linked to retirement and long-term financial security. Seventy percent of respondents who saved for emergencies maintained or increased their long-term retirement savings.
“Saving for the short-term may actually make long-term saving more likely,” said Flacke. “This demonstrates the potential of employer-sponsored emergency savings initiatives, and the SECURE 2.0 Act makes it easier for employers to offer these tools to their workforce.”
SEE ALSO:
- Senate Passes $1.7T Spending Bill Containing SECURE 2.0—Now On to the House
- It’s In! SECURE 2.0 Act of 2022 Included in Omnibus Appropriations Bill
- 6 Steps to SECURE 2.0
Amanda Umpierrez is the Managing Editor of 401(k) Specialist magazine. She is a financial services reporter with over six years of experience and a passion for telling stories and reporting news. Amanda received her degree in journalism and government and politics at St. John’s University. She is originally from Queens, New York, but now resides in Denver, Colorado with her partner. In her free time, Amanda enjoys running, cooking, and watching the latest drama show.
