For many, it’s one of those unfortunate facts of life: financial emergencies happen. How prepared are your plan sponsor clients’ 401k participants?
According to statistics, not very.
In its newest white paper, “Increasing Financial Security with Workplace Emergency Savings,” Prudential Financial reports that 63 percent of Americans can’t afford a $500 emergency—the cost of minor car repairs—and 31 percent of employees would consider retirement plan loans or withdrawals to cover those expenses.
This is obviously a huge problem—so much so, Washington is getting involved.
Democratic Sen. Heidi Heitkamp introduced a bill addressing the issue to Congress earlier this month with bi-partisan support from the likes of Sens. Tom Cotton (R-Ark.), Cory Booker (D-N.J.) and Todd Young (R-Ind.).
The “Strengthening Financial Security Through Short-Term Savings Accounts Act of 2018” has since seen praise from industry experts.
“I commend Senators Heitkamp, Cotton, Booker and Young for turning this promising idea into smart, carefully crafted legislation. By giving the green light for employers to automatically enroll their workers into short-term savings accounts, this bill has the potential to spur much-needed innovation, experimentation and uptake—similar to what happened to employer-sponsored retirement accounts after the Pension Protection Act passed over a decade ago,” Ida Rademacher, executive director of The Aspen Institute Financial Security Program, said in a statement.
“Today’s working families need new tools to meet the unprecedented short- and long-term financial challenges they face. Sidecar rainy day savings may well do both—by building up an emergency fund while simultaneously reducing the need for premature withdrawals from retirement accounts.”
As such, Prudential has teamed up with the nonprofit group Prosperity Now to take its hand at designing “a potential solution using payroll deductions to fund after-tax contributions.” The feature is available now to Prudential Retirement plan sponsors as part of their financial wellness package.
According to the company, its emergency savings component is beneficial to both employers and employees in myriad ways.
Advantages for employees:
- Ready access to funds. Employees may be more willing to contribute to retirement plans after-tax, since they can access after-tax savings in an emergency when needed.
- Peace of mind. Could reduce stress related to not having money for unexpected emergencies.
- Ease and flexibility. A convenient way to save at the workplace and track progress.
Advantages for employers:
- Optimize benefits spend. Plans are funded by employees and leverage existing infrastructure.
- Reduce leakage from retirement plans. Could help employees strengthen day-to-day financial health, reducing the need to raid pre-tax retirement savings in the event of an emergency.
- Mitigate the cost of delayed retirements. A one-year increase in average retirement age can raise workplace costs 1 to 1.5 percent for employers.
- Improve employee engagement, morale and productivity. Nearly one in three employees say personal finances have distracted them at work.
“Making it easier for employees to build savings that can also be used in an emergency is the natural next step in the evolution of retirement plan design,” contested Phil Waldeck, president of Prudential Retirement. “A small additional contribution each pay period may help build a financial cushion and reduce the effects of 401k plan withdrawals and loans that may cut into employees’ retirement savings and increase workforce costs for employers.
“For employees that never need to use it, the money eventually adds to their long-term retirement savings,” he concluded.
Jessa Claeys is a writer, editor and graphic designer.
