Creating an environment for automated emergency savings plans

Two events are occurring simultaneously that are causing concern. First, the volatile nature of COVID and its effects on the job market are creating a situation of uncertain income streams and income gaps. Second, the need for emergency funding has become even more important in this environment – something Americans have little of or have considered as part of their retirement savings.

However, there are options, at the policy level, that can aid workers within their workplaces to better save for emergencies and provide a bit of a financial cushion should such situation arise. A report from the Aspen Institute entitled Moving From Experimentation to the Mainstream: Policy Options to Automate Workplace Emergency Savings, provides solutions that can eliminate or reduce barriers to automatic workplace savings and can be available to workers no matter where they work or how they get paid.

Of course emergency savings are different from long-term savings in that they are meant for unexpected expenses in difficult times. As a result, the Aspen Institute suggests the following features of a successful workplace emergency savings plan:

Auto-enrollment – Workers should be automatically enrolled and have pay deducted into an emergency savings program. Of course, opting-out or cancelling the deductions is an option but, when auto-enrollment was introduced into 401(k) plans, participation doubled with 91% of new hires participating and increased the participation of younger, lower-income and female workers.

Automatic replenishment – Emergency savings accounts should be able to be replenished (after usage) through recurring paycheck deductions.

Accessibility – An emergency savings account should allow workers to have unlimited access to their funds and face no penalties upon withdrawals.

Liquidity – The funds should be stable in that they should not fluctuate in value and should be easy to liquidate when needed. This protects the employee if they need the funds at the same time as a market downturn might occur.

Low or no fee – High fees on 401(k) or other investment funds can erode savings. Employees needing emergency funds want to maintain as much as possible and therefore should be offered accounts with no or low fees.

Designed for “mental accounting” – Emergency savings are best places in a separate account rather than bundled with other accounts. The reason being that this allows for, what behavioral scientists call, mental accounting – in which people assign their money to different categories. Ultimately, when savings are assigned to different uses, people are more likely preserve the funds for their intended uses.

Although the concept of employee emergency savings plans or accounts has been relatively untapped, some workplaces have adopted and are creating three new types of plans:

Retirement-linked emergency plans – These so-called “in-plan” or “sidecar” accounts are provided by and administered by a retirement plan provider. The accounts are embedded in with the retirement plan and use the existing infrastructure of the system to provide access to emergency savings, usually saved through payroll deductions. Because they are linked to retirement plan savings accounts, these emergency plans may have tax implications upon withdrawal.

Examples of companies using these plans are Maryland$aves, UPS and Prudential.

Bank-based emergency savings – Bank-based savings accounts use a depository account through a bank or credit union. They are FDIC insured and are governed by banking regulations.

Examples of companies using these plans are Pitt Ohio and MassMutual.

“Payroll card” emergency savings – A third option for emergency savings payroll deduction is through a debit card-like payroll card. Usually, a payroll card holds an employee’s payroll instead of using direct deposit to a checking account. Emergency savings payroll cards can be used to deduct some of the employee’s income for emergency savings.

Example of a company using this saving method is the AARP.

Still there are regulatory barriers to auto-enrollment in the three types of workplace emergency savings plans. According to the Aspen Institute, any real national change (rather than case-by-case) will require policymakers to take steps to ensure auto-enrollment into workplace savings is widely available.