Emergency savings accounts are having a moment.
The Wall Street Journal calls matching emergency savings accounts the “the new employee benefit” in an Aug. 27 article, singing the praises of their ability to help attract and retain workers while providing much-needed help to better prepare them for unexpected expenses.
The Journal has taken note of a pandemic-fueled surge in popularity for this relatively new and previously under-the-radar form of employee benefit, with an increasing number of companies encouraging employees to fund emergency savings accounts—and sometimes offering matching contributions or other incentives to get the ball rolling.
The article says employers are taking action, in part, because the pandemic “highlighted how unprepared many Americans are for financial emergencies,” said David Amendola, senior director at consulting firm Willis Towers Watson.
A recent Willis Towers Watson survey of 464 employers found 26% offer an emergency account in their retirement plan and 19% said they are likely to add them.
Responding to demand from employers, the article goes on to say banks, nonprofits, startups and 401k recordkeepers are launching workplace programs designed to help workers build emergency savings, often through payroll deductions.
Some let workers divert a portion of their paychecks into emergency accounts within 401k plans while others, due to legal and tax complications, offer emergency savings accounts outside the 401k, using bank or brokerage accounts.
Should this be looked as at a slight bit of competition for 401ks—or as a complement to them?
The argument is often made that if people can’t cover a $400 unexpected expense, they have no business setting money aside for retirement. A recent (and frequently cited) Federal Reserve survey found 37% of U.S. households couldn’t come up with $400 for an emergency expense if they had to. Once they have that emergency fund, they are in a much better position to begin saving for retirement. After all, if they have to raid their 401k for a loan or an early distribution in the event of an emergency, what’s the point?
Recordkeepers rally around ESAs
Earlier this year, industry nonprofit Commonwealth released a report detailing how 401k recordkeepers are leading the charge to address the emergency savings crisis, rushing to create both in-plan and out-of-plan solutions.
The report summarized interviews with nine of the largest U.S. recordkeepers—with eight of the nine either offering or planning to offer an emergency savings product. Additionally, of the seven plan sponsors interviewed for the report (collectively employing 870,000 workers), four said they plan to offer emergency savings in the near term, either through their recordkeeper or credit union.
“The emergency savings crisis has only been exacerbated by COVID-19; therefore, it is even more important today that recordkeepers develop emergency savings solutions as soon as possible,” the report’s executive summary states.
Workers, it appears, are anxiously awaiting these solutions. According to an AARP survey, 71% said they’d likely participate in a rainy-day savings program funded by payroll deductions if offered to them—and that percentage jumped to 85% if employers were offering a matching contribution.
According to the WSJ article, T. Rowe Price plans to introduce an emergency savings program later this year to the 5,900 employers that use it as a 401k recordkeeper. “Those choosing to participate will link their bank accounts to an app that transfers what it calculates they can afford to save, based on past spending patterns, to an FDIC-insured savings account,” the article states.
Social Finance Inc. launched an emergency savings program this summer in a workplace benefits program used by 900 employers, who the Journal says generally pay the fees on the accounts and contribute an average of $50 per month through matching or incentive programs.
Also mentioned in the piece was Secure, a Seattle-based startup (co-founded by Suze Orman) solely focused on helping people save for an emergency by way of their employer’s benefits program. The platform was made available to employers in early 2021.
“After researching the industry, we found an astounding need for a simple solution to the massive emergency savings problem. We have made it our mission to help people save for the unexpected and better navigate financial hardships,” said Devin Miller, co-founder and CEO of Secure.
SEE ALSO:
- Family Emergency Expenses Still a Major Problem, EBRI Finds
- Senate Bill Seeks ‘Penalty-Free’ Emergency Distributions from 401ks
- Nearly Half Say Pandemic Has Eroded Ability to Save for Retirement
- Emergency Fund Emergency: Financial Wellness Programs Rush to Aid of Unsaved Workers
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
