Short-term savings crucial for employee retirement security
Why offering an employer-sponsored emergency savings plan can help with retirement security and what elements a plan should include.
As employers increasingly prioritize worker financial wellness, the COVID-19 economic crisis is calling attention to the ripple effect that a lack of liquid savings for emergencies can have on an employee’s retirement security.
October is National Retirement Security Month, an opportunity to reflect on what workers truly need to be successful in the long term when it comes to retirement savings. Forward-thinking employers are beginning to understand that to enable retirement security, they need to enable short-term financial stability through tools that allow workers to build highly liquid emergency savings accounts.
Why emergency savings?
Even prior to COVID, short-term financial insecurity was a widespread, pervasive issue–particularly for low-to-moderate income employees.
According to a Commonwealth analysis of Federal Reserve data, 58% of households making under $60,000 don’t have $400 in savings for an emergency. For Black households, that number rises to 71%.
And a lack of emergency savings isn’t siloed from the rest of an employee’s financial life, according to an ongoing Commonwealth & DCIIA Retirement Research Center study tracking how lower- and moderate-income plan participants are handling retirement during the pandemic. Our most recent findings showed that people who were setting aside money for emergencies were half as likely to dip into their retirement savings during COVID.
Many lower- and moderate-income workers opt out of retirement savings. But for many of those who opt in, they will not have the cash on hand to manage an emergency if it arises–leading them to tap their retirement savings. In either case, long-term wealth building–in this case, retirement investments–is endangered.
The employer role in emergency savings & retirement security
Stress around retirement readiness is rising: 44% of 401(k) participants in a 2020 Charles Schwab study said saving enough for a comfortable retirement is a significant source of stress today–significantly higher than the past two years.
Nearly two-thirds of 40-year olds have less than $100K saved for retirement, and nearly half of those in their 40s have withdrawn from their retirement accounts, according to another 2020 Ameritrade survey.
These numbers are not just bad for the retirement outlook of American workers. They are also bad for employers. The chronic stress of worrying about short-term finances is disruptive for employees, resulting in lower productivity at work, which costs companies up to $250 billion per year.
Employers feel this pressure. Sixty-two percent of companies feel extreme responsibility for their employees’ financial wellness–up from just 13% in 2013. And 80% of employers large and small said they believe financial wellness helps deliver more loyal, satisfied and engaged employees, and greater employee productivity.
Employees are eager to follow the lead of their employers. In an AARP survey, more than 7 in 10 workers said they would be likely to participate in a payroll-deduction rainy day savings program if their employer offered one. Employees said that increased savings and reduced stress were their main reasons for potentially participating in such programs.
An opportunity for employers
There is a gap between the importance employers place on employee financial well-being and the offerings they are providing to enable financial security for their workers.
While for decades, employers have put an emphasis on the important matter of a secure retirement as a foundation for financial wellness, recent data is indicating that short-term financial stability is a precursor to retirement security.
Emergency savings is an important foundation–one that workers rely on for unexpected expenses or income volatility, which has increased during COVID. Sixty-six percent of the plan participants in our survey said they have saved for emergencies in the past year–and 42% of those savers have made withdrawals from those funds in the past seven months.
Many forward-thinking employers are launching liquid emergency savings products into which employees can automatically contribute; people who save automatically are likely to save more.
Short-term savings products are beneficial for recordkeepers, plan sponsors and employees alike–providing decreased leakage in the form of hardships and loans and more sustainable retirement savings by employees, who can use their 401(k)s for retirement, not emergencies.
Offering liquid emergency savings that results in employee stability can also create increased participation in the retirement plan for LMI workers who have opted-out prior.
Those business leaders particularly focused on leading the way for employee financial security can leverage new policy guidance from the Consumer Finance Protection Bureau, which opens the door for Autosave.
An Autosave program functions much like a 401(k): employers can automatically enroll workers in paycheck deductions that are routed into a liquid savings account–just as they can automatically deduct for a retirement account.
Elements of an employer-sponsored emergency savings plan
A good emergency savings product has a few key features: it must be liquid, portable and easily transferred to a new employer or when the individual leaves the workforce, principal-protected, low- or no-fee to meet small-dollar savings needs, and transparent, with terms and conditions clearly communicated.
The associated messaging should promote or advance a financial security mindset–positioning financial security as a journey, emphasizing agency, and presenting attainable aspirations.
It should distinguish retirement savings from short-term savings–a significant change from a focus on long-terms savings only.
Employers should also consider design choices and incentives that improve engagement and usage in any emergency savings solution they implement.
One proven example is prize-linked savings, or providing an incentive to save by linking savings behavior to chances to win a prize. This innovation has been demonstrated at scale through Walmart’s Prize Savings program, which helped customers save over $2 billion.
The need for these tools is not new, but the urgency of that need is. The current economic crisis and subsequent stress on employees demands tools to make financial security possible. Supporting low-to-moderate income workers, who struggle with financial stability and resilience as a first-order challenge, is increasingly crucial.
