Why employers should consider adding emergency savings to their benefits ecosystem

Are more of your employees taking hardships and loans from their retirement plan? Are your workers increasingly stressed about their financial situation as they are struggling to pay for everyday living expenses as inflation takes its toll on their budgets? Sadly, the answer is likely yes to many of these questions, and employers are left wondering how they can help employees get on a more secure financial path. For many individuals, a lack of adequate emergency savings has been a growing need and focus, which has only been heightened in recent years by the impacts of COVID-19 and inflation. In addition to these challenges, recent industry research has found that without savings to fall back on, 35% of individuals would have to borrow funds to pay a $1,000 unexpected expense, either by financing with a credit card, taking a personal loan or turning to friends or family.

The fact is that unplanned expenses are surprisingly common across all age groups and economic levels — and not having adequate emergency savings to cover unexpected expenses can be a major contributor to financial stress. This can negatively impact workplace productivity and the employer’s bottom line, plus it can put employees’ retirement at risk. This is where an emergency savings fund can help support the short-term needs that individuals face today, which in turn can help improve their long-term goals and make them feel more financially secure overall.

How a lack of emergency savings can put retirement at risk

The reality is that employees without adequate emergency savings often turn to their retirement plans to meet short-term financial needs. When medical bills, car repairs or other unexpected expenses occur, employees might turn to their retirement account for money if they don’t have other savings available. However, these early withdrawals do not come without cost. In addition to fees, penalties and taxes, the costs of reduced savings and potential investment earnings can impact one’s long-term retirement savings as well. In fact, according to Voya retirement plan participant data, employees without adequate emergency savings are 30% more likely to decrease contribution rates, 13 times more likely to take a hardship withdrawal and three times more likely to take a loan from their retirement plan.

Taking early distributions from one’s retirement account can also create compounding shortfalls for younger workers that will require them to increase savings rates for years to come, making it harder to build emergency savings funds alongside their retirement contributions. For those nearing retirement, lower plan balances due to early withdrawals might require them to work longer.

In contrast, however, Voya has also seen from its participant data that those who do feel financially secure — meaning they have an emergency savings of three plus months of living expenses — on average, contribute about 50% more to their long-term retirement plan than those who acknowledge that they don’t feel financially secure. Not only do these individuals save more (51% more, in fact), they’re also, on average, on track for a secure retirement and have a higher income replacement (14% higher).

The employee need is clear

Many Americans have additional competing financial priorities. Following the financial impacts many individuals faced throughout the pandemic and heightened further by recent years of inflation, as individuals continue to focus on building savings and improving their overall financial wellbeing, many are looking to their employers for support. According to new Voya data, nearly half (47%) of Americans strongly agree or agree that their retirement savings is the only significant form of emergency savings they have. In addition, 72% of benefits-eligible Americans are interested in a support and guidance tool that helps them understand how much money to put aside for retirement, emergency savings and health care expenses.

The reality, though, is many individuals do not recognize how many great resources are available to them directly from their employer — and many without cost. Furthermore, according to additional Voya data, 55% of employed Americans are more likely to stay with their current employer if offered a workplace emergency savings plan. With this in mind, there are many different approaches that employers can take to help employees with emergency savings.

How employers can help

The good news is that, like individuals, lawmakers have caught onto the need for emergency savings support. As the recent SECURE 2.0 provisions have become available to employers in 2024, the opportunity for increased access to emergency savings support could expand financial wellbeing for employees. Both in-plan and out-of-plan solutions are areas where employers are focused to meet the unique needs of their employees, but knowing where to begin as an employer can certainly be overwhelming. Even before the passing of SECURE 2.0, at Voya, we have been conducting research aimed at helping employees build a financial cushion so they can improve their financial security. Through this ongoing research, we’ve learned that positive messaging, encouraging employees to start small as well as leveraging incentives where possible can be effective. And while we believe there is no “one size fits all” solution, we would advocate for making it easy to start (e.g., leveraging the power of automatic features and defaults).

While the employee need is clear, from an employer perspective, it comes down to prioritization and customization within their own broader benefits package and offerings. To ensure benefits dollars are being invested where employees need the most help, we suggest analyzing benefits utilization and financial wellness data across income, age and other demographic factors. Employers should also reach out to their workforce for its input to better understand what employees value most. This remains relevant as new Voya research has found that 37% of working Americans agree that their employer is their go-to No. 1 resource for information to improve their overall financial wellness.

Once a solution is selected, developing a robust engagement and education strategy is critical to generating awareness and utilization to help employees improve their financial resilience. Actionable information and consistent communication on how to achieve positive outcomes are also important. Employers may consider offering guidance on household budgeting, spending and cost-cutting plans — along with step-by-step saving strategies.

Additional areas of support

There are many different approaches that employers can take to help employees with emergency savings. Solutions can run the gamut from adjustments to existing benefits, to standalone programs solely focused on building and maintaining an emergency fund. In addition, more and more employers today are offering holistic financial wellness solutions to support their employee base, including:

• Health savings accounts (HSAs) to offset the burden of eligible medical costs;
• Student loan debt support; and
• Expanded offerings for supplemental health insurance.

At Voya, we have seen unreimbursed medical expenses as the second-leading reason why employees are taking hardship withdrawals from their retirement plans (just behind preventing eviction or foreclosure). “Voluntary” benefits such as accident insurance, critical illness or specified disease and hospital indemnity insurance are increasingly being sought out to help minimize the financial impact of specifically covered events and maybe even reduce the need to tap into a retirement account for any out-of-pocket medical or other expenses.

Related: Emergency savings account: A valuable benefit, now made easier with SECURE 2.0

Final thoughts

Improving financial resilience by maintaining an emergency fund requires an employee to acknowledge the value of saving for an emergency — and then commit to the savings process. Employers that offer emergency savings accounts have a tremendous opportunity to move the needle on benefits equity in a tangible way, promote financial wellbeing and provide benefits that may help retain employees. Recognizing that employers are trying to optimize their own benefits spend, now is a great time to talk to your employees, analyze their needs and consider how emergency savings and related workplace benefits solutions could go a long way in helping your valued employees’ current and future financial security.

Tom Armstrong, VP, Customer Analytics and Insights, Voya Financial