Matching emergency savings: The must-have benefit for 2023

Imagine that the water heater breaks in your house, or that your car won’t start in the morning when you try to drive to work. Do you know how you’d pay for such an unexpected expense?

Believe it or not, a majority of Americans can’t answer that question with a “yes.” According to a recent survey we conducted at SecureSave involving more than 1,000 respondents, 67% of Americans have no way to cover a $400 emergency.

This is a big deal for employers because it has ripple effects not only impacting employees’ long-term retirement savings, but also their ability to be productive at work: 30% of survey respondents spend one to two hours every day worrying about money, and 75% of them say that this financial stress is hampering their work productivity.

The need for financial support

Why are so many Americans experiencing this financial stress? Persistent inflation and rising costs of living are one big factor: Consumer prices rose 6.5% year-over-year between 2022 and 2023, and 65% of Americans surveyed said that inflation was the variable with the biggest impact on their finances.

This has resulted in a decline in personal savings, both for short-term emergencies or expenses, and for long-term planning. The majority of survey respondents (54%) said their personal savings have decreased over the past year, and 61% of Americans either stopped contributing to their retirement savings or had never started saving for retirement at all.

Our research found that 74% of respondents, three out of four, are living paycheck-to-paycheck. It’s no wonder that so many of them don’t know how they’d cover a $400 emergency when they’re so thinly stretched.

Americans who do have retirement savings accounts are more likely to tap them if they don’t have liquid cash on hand for an emergency. A recent study found that respondents with less than $2,000 in liquid savings were twice as likely to take out a 401(k) loan or hardship withdrawal.

And financial stress has ripple effects for workers beyond limiting their ability to save for retirement: Carrie Leana, George H. Love Professor of organizations and management at the University of Pittsburgh, and an expert on financial precarity conducted a laboratory study with 90 participants, enquiring about their current financial resources, and then asking them to imagine that their car had broken down and would need a repair costing either $150 or $1,500. Then, the participants completed certain cognitive tests and used a driving simulator. Predictably, the participants who had the fewest financial resources and who were asked to imagine a $1,500 repair price tag committed more traffic violations in the simulator than other groups of participants.

Emergency savings: Why this is the best place to start

There’s a deceptively easy way to solve this problem for most Americans: Save more money in case of an emergency, in a specific account that you can access whenever you need.

An emergency fund is designed to be used. It’s not like a long-term savings account, where plan participants have to navigate paperwork and rules to pull out money. These accounts are intended to be depleted and possibly even emptied periodically as emergencies arise.

Why create a separate account just for emergency savings? There are few reasons why this is a smart plan. First, creating and labeling an account specifically as an emergency fund has some psychological benefit to the savers: They will be less likely to empty it for frivolous reasons, and also more likely to turn to it when experiencing a financial crisis.

From an administrative perspective, it’s also simpler and more efficient to create a separate emergency savings account that’s not connected to any other savings plans, such as a 401(k) or other retirement plan. While any emergency savings is better than none, a linked emergency savings account must align with certain rules (including a cap on the amount in the account). Keeping these accounts separate and simple is a smart way to encourage saving for an emergency.

The importance of accessible financial support and emergency savings

I was involved recently in a panel discussion with Carrie Leana, who shared some data that showed how employers can make financial support and emergency savings more accessible for their employees, based on a study conducted at a national transportation company that tracked both participation in an emergency savings account (ESA) provided by the company and preventable accidents that happened during this timeframe.

Related: Save for retirement or build up emergency funds? Helping employees do both

For the experiment, the employer offered an ESA and agreed to match a certain percentage of employee contributions after one year of participation. The workers deposited $19 per paycheck into an account that they could access at any time for any reason. By the end of one year, employees had saved an average of $1,100 per employee in their ESAs, and this program cost the employer about $118 per employee. The return on investment for this company was significant because contributing to the emergency savings was shown to have a direct effect on worker productivity and safety, reducing driving citations, accidents, and fatalities.

According to Leana, the program reduced financial precarity and associated financial stress and worry among employees. A matching methodology implemented into the study allowed Professor Leana to show not just correlation but causation by linking study participants who were using the ESA with other similar control study participants who were not, and then comparing their driving safety records against each other.

Drivers who had experienced a financial setback in the previous 12 months were more likely to be cited for a traffic safety violation if they hadn’t set up an ESA than if they had. Due to the hefty cost of a truck accident (between $148,000 and $7,000,000 if someone is hurt or killed), the participating employer saved a significant amount of money with just a $118 per-employee investment.

What a solid employer-sponsored ESA looks like

The trucking company that participated in Leana’s research was an excellent example of an employer that lowered stress and increased safety and productivity for their employees by providing an ESA. Other enterprises can do the same, and at SecureSave, we’ve noticed a few best practices that help employers maximize participation and savings.

Our average plan participation is 58%, and we’ve noticed that employers who get the best participation use the following features to drive engagement:

• Focusing exclusively on emergency savings, not bundling an ESA with a long-term retirement account
• Providing invitation-based signup to make onboarding easy
• Ensuring that employee has full access to the account and control of all the money in it
• Establishing a minimum per-paycheck participation amount
• Creating an incentive to drive engagement (such as a sign-up bonus, per-paycheck match, or milestone bonus)

Apart from a 58% adoption rate, we’ve also seen 99% month-over-month user retention of the employees who sign up for an ESA through SecureSave. Those employees save an average of $83 per month, or nearly $1,000 in a year. Between 15% and 20% of users access the funds in any given month, and fewer than 2% of participants harvest incentives (such as a sign-up bonus) and then leave the program.

Many Americans are experiencing a worrying level of financial precarity in 2023 — quite literally: Our research shows that 30% of respondents spend one to two hours every day worrying about money. That’s a full working day every week that’s lost to financial stress!

We hear about these stories every day at SecureSave. It’s not uncommon to be talking to an executive about how ESAs can benefit their employees, and while we’re on the phone having the discussion, the executive gets an email notification that an employee is making a 401(k) hardship withdrawal.

Providing an employer-sponsored ESA that is easy to opt into, provides incentives for participating workers, and gives them quick and easy access to the money they’ve saved can both alleviate daily financial stress and better preserve long-term savings. We’ve seen huge adoption and engagement with our own clients, and brand-new research shows that providing emergency savings at work can even decrease work-related accidents.

Devin Miller is co-founder of Securesave, a startup automating emergency savings for employees through employer-matched payroll deductions.