What recordkeepers are doing to help Americans build emergency savings
Plan sponsors want to help their employees build emergency savings, and many recordkeepers have shifted to work toward that goal -- but the industry isn't in agreement on several factors.
A significant percentage of Americans are unprepared to pay for unexpected expenses — more than one-third do not have enough money saved to handle a $400 emergency. The employee benefits ecosystem is increasingly looking for ways to help employees build financial wellness, including emergency savings, and retirement plan recordkeepers have a role to play.
Emergency savings: Not if, but how and when
Commonwealth and the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center interviewed nine of the nation’s largest recordkeepers along with a cross section of plan sponsors across the United States to find out their plans and perspectives on workplace emergency savings products. The report predicts it is not a matter of if recordkeepers will offer emergency savings plans but how and when.
In-plan and out-of-plan options
All but one of the recordkeepers interviewed for the study offer or are planning to offer an in-plan or out-of-plan emergency savings product, although the majority were leaning toward offering out-of-plan solutions and several indicated they would offer both types. In-plan options offered through a 401(k) plan offer the benefit of leveraging pre-existing payroll integration and could spur increased plan participation. The benefits of out-of-plan options include quicker time to market, the ability to include engaging product features, and portability among employers.
Plan sponsors were split on whether they prefer in-plan or out-of-plan emergency savings options. Their key concerns for any emergency savings solution were focused on acting as a fiduciary for their employees, employee engagement and utilization, cost implications, and limiting the number of vendors involved. The majority of plan sponsors interviewed said they plan to engage with their employees about emergency savings, and about half indicated plans to offer an emergency savings benefit in the near time either through their recordkeeper or credit union.
New shift in recordkeeper role?
Recordkeepers surveyed indicated the emphasis on emergency savings products represents a shift in how recordkeepers see their role in ensuring financial security for participants.
Recognizing that building emergency savings should come before building retirement savings is a mindshift that has taken time for the ecosystem to accept, but is important to discourage the use of retirement savings plans as a source to pay for emergency expenses, they said. Plan sponsors surveyed similarly recognized the importance of building emergency savings to pave the way for better retirement savings outcomes.
The idea of introducing products around emergency savings was already circulating among recordkeepers before the pandemic hit last year, an event that brought the need for short-term liquid savings into sharp focus.
However, the study found employees seem to have weathered the crisis well financially. Recordkeepers said retirement plan withdrawals to cover coronavirus-related distributions (CRDs) were not as high as they initially expected and one indicated that most of those who did take CRDs did not drop their savings rates but actually increased them, indicating those employees may be focused on paying the distributions back.
Improve retirement readiness, reduce financial stress
The top goal among most recordkeepers in considering offering emergency savings products is to improve plan participant retirement readiness by reducing loans and withdrawals from retirement accounts.
Beyond helping plan participants meet retirement goals, recordkeepers are also interested in innovating in the emergency savings space to meet plan sponsor demand and remain competitive, according to the study.
Meanwhile, plan sponsors are looking for emergency savings products to help them reduce employee financial stress by avoiding credit card debt, hardship withdrawals and 401(k) loans.
How much money should be in emergency savings?
There was no universally accepted definition of what constitutes adequate emergency savings. Recordkeepers surveyed indicated a range of $1,000 up to an amount equal to six months of expenses.
The study pointed to Vanguard’s guide to emergency savings, which recommends people not only set aside cash for common spending shocks but also for income shocks — the loss or reduction of employment income. That guidance calls for emergency savings of $2,000 or half a month’s living expenses to cover common spending shocks and up to six months of living expenses to cover income shocks.
However, some recordkeepers expressed concern about a potential “cash drag” if employees keep six months of living expenses in cash, recommending instead that they should invest those funds.
Others, however, said given low interest rates, rate of return is not a priority. As far as accessibility to emergency savings funds, recordkeepers were split, with several worrying that immediate access to emergency funds would encourage participants to use them for day-to-day expenses rather than emergencies.
Employees still might not take advantage of it
Offering emergency savings products and getting employees to take advantage of them are two different challenges, noted the report. Commonwealth said strategies like prize-linked savings, gamification and automation can help increase participation and overall savings.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics.
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