Emergency savings: A key addition to a company retirement plan
Companies need to prioritize outreach to low- and moderate-income workers, who are disproportionately less likely to participate in workplace retirement plans, according to a new report.
A new report from Commonwealth has suggested that providing emergency savings solutions could be an important addition to a company’s benefits plan. The report noted that many workers and companies are re-examining financial planning and resources, and that in addition to saving for retirement, having an emergency savings plan could be valuable for low-to-moderate income (LIM) workers.
“Millions of people lack access to high-quality, low-cost tools to save for the unexpected,” the report said. “Providing an emergency savings account through the workplace is foundational to increasing financial security and ultimately building wealth for workers earning LMI. The employer sponsors and recordkeepers of defined contribution workplace retirement plans are uniquely positioned to provide quality emergency savings products to plan participants.”
The new findings were part of research from BlackRock’s Emergency Savings Initiative, conducted by Commonwealth and the Retirement Research Center at the Defined Contribution Institutional Investment Association (DCIIA). The groups administered five sets of surveys of participants in defined contribution workplace retirement plans and interviewed nine of the largest plan recordkeepers and seven plan sponsors for the study.
A new way to engage workers
The report noted that this area is another way for companies of all sizes to engage their workforce in the area of financial benefits. The trend toward more offerings around financial resources and savings benefits has become a big part of the HR conversation over the past few years, and emergency savings are an important way that employers can connect with workers.
“Workers are overwhelmingly interested in incentives—whether for opening, sustaining, or building savings—to motivate active participation,” the report said. “Companies need to prioritize outreach to Black and Latinx workers living on LMI, who are disproportionately less likely to participate in workplace retirement plans.”
Having a designated emergency savings account makes a difference, the data showed. The researchers found that respondents with specific accounts for emergency savings had more liquid savings than respondents who save for emergencies but did not have an earmarked account.
In addition, having little or no liquid savings increased the likelihood that participants would take a 401(k) loan or hardship withdrawal or otherwise reduce contributions to their retirement savings. “Survey respondents with less than $2,000 in liquid savings were twice as likely to have tapped into their retirement plan accounts,” the report said. “This was also true of the 34% of respondents who did not save for emergencies once the pandemic started.”
A role for plan providers
The report also had insights for companies providing retirement savings plans. The research identified what emergency savings ideas worked best for LMI employees. For example, LMI workers need to be able to quickly access emergency savings accounts without a penalty. Other barriers, such as requiring a minimum account balance or assessing account fees, can also be disincentives for LMI workers in establishing emergency savings accounts.
The report’s sponsors pointed to examples such as a recent UPS emergency savings plan, offered in conjunction with BlackRock’s Emergency Savings Initiative. The delivery service partnered with BlackRock, Commonwealth, and Voya to create an emergency savings program for UPS’ nearly 100,000 non-union employees. That program resulted in $10 million in new savings, the report said.
Related: SECURE 2.0 links emergency savings to retirement plans: 8 best practices
Nick Maynard, SVP at Commonwealth, said that such programs show the value of providing an emergency savings option. He noted the recent passage of the SECURE 2.0 Act by Congress provides impetus for more work in this area.
“The passage of SECURE 2.0 validates the important role that employers play in employee financial well-being, particularly building emergency savings. The emergency savings provisions will allow employers to further drive employee savings through research-backed design features like automatic enrollment for in-plan emergency savings vehicles through retirement plans,” Maynard said. “Even before the provisions from SECURE 2.0 are enacted in 2024, employers have the opportunity to meet a key need of their diverse employee base, and advance their financial security, with proven mechanisms that have been tested with large employers, retirement service providers, and payroll providers.”