The emergency savings benefits that low-income workers are looking for

A new study has found that emergency retirement savings plans can be an attractive option for lower-income workers.

The study, by Commonwealth and the Defined Contribution Institutional Investment Association, found that workers earning low and moderate incomes (LMI) who have emergency savings accounts were 70% more likely to contribute to their defined contribution plan.

The study said that LMI workers face challenges to financial security, which have become even more pronounced with things like the pandemic, inflation, and other recent challenges.

“Emergency savings solutions have emerged as foundational ways to build financial security. Early research has shown it to be a predictor to increasing savings and, ultimately, building wealth for workers earning LMI,” the report said. “These workers have expressed interest in and need for these solutions and, when offered, have used emergency savings to improve their own financial security.”

90% are interested in incentive options 

The report found what it called “clear guideposts” on designing an emergency savings option for workers. For example, LMI workers prefer no fees, no minimum balance requirements, and immediate access to funds in these accounts.

Of those features, liquidity—the ability to immediately access funds—was described as the biggest challenge for plan sponsors to deal with. But it was strongly preferred by plan members in focus groups, the report said.

The study also found that participants are overwhelmingly interested (90%) in incentives to help motivate them to open a savings account.

“Incentive options that were positively viewed included a reward to open an account (98%), matching contributions (96%), a reward for consistent savings (93%), and a reward for reaching a target savings amount (92%),” the study said. “The overwhelming interest in different incentive types highlights how incentives are not only helpful in motivating participants to open a savings account, but also may encourage better long-term savings behavior while demonstrating employers’ commitment to their employees’ financial wellness.”

Challenges to savings

The study found that LMI workers with no emergency savings were significantly less likely to be contributing to a defined contribution plan. “Offering an emergency savings solution could be an effective mechanism to boost plan retirement participation amongst employees, the researchers wrote. “Further, emergency savings also helps to protect retirement assets. In our previous research, we found that, during the pandemic, those with emergency savings were less likely to tap retirement savings to cover an unexpected expense.”

The study also said that there are challenges in getting LMI workers to link a savings account to a retirement account and providing the emergency savings option could help make retirement savings more accessible to younger employees or employees of color.

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An earlier Commonwealth study noted that the inability to automatically enroll employees in emergency savings plans could be keeping participation lower. The auto-enroll function, which would allow employees to opt out after being automatically enrolled, may play a role in the comfort level of employees—for example, when auto-enrollment became a standard feature of 401(k) plans in the US, participation nearly doubled, with 93% of new hires contributing. Automatic enrollment also dramatically increased participation among younger, lower-income, and female employees.

“Automatic enrollment can help ensure equitable access and participation to emergency savings plans in the workforce,” the researchers said.

The study concludes by noting that employers can appeal to potential workers and build loyalty from current workers by helping them have more financial security and flexibility at a time of economic uncertainty. “Plan sponsors and recordkeepers are uniquely positioned to offer emergency savings solutions that employees earning LMI are interested in and can improve their financial wellbeing,” the report said. “Employees believe employers should be playing a leading role in this space; providing emergency saving solutions that meet employees’ savings needs can help to improve employee productivity and retention.”