Congress must help make emergency savings automatic

It’s crunch time in D.C. Enormous legislation under consideration could have big implications for the retirement system. With the Biden Administration’s Build Back Better Act, and Secure 2.0 legislation over the horizon, policymakers have a historic opportunity to make the retirement system more relevant and useful to the financial security of tens of millions of working families. There are three areas that should be priorities.

First, it’s time for the retirement system to focus on both long-term and short-term savings.

People already use retirement savings to manage short-term needs through 401(k) plan loans, hardship withdrawals and by cashing out during job transitions. With millions of households financially stretched thin, many more so now as a result of Covid, we must recognize this fact and address it with intention and care. Any retirement legislation should include provisions for emergency savings.

In the words of former Obama administration senior official and long-term retirement policy architect Mark Iwry, “It’s both desirable and feasible to build short-term saving into the retirement saving system in a more deliberate, well-designed, well-managed way. Our existing saving infrastructure can more effectively help people meet their very real and frequent needs for emergency or short-term saving.”

With care, Iwry noted, “this approach could also increase retirement and other long-term saving.”

Second, short and long-term savings in retirement accounts must be complementary, not competitive.

The key is good design. Richard Thaler and other behavioral economists have taught us the power of “mental accounting,” that how we label different buckets of money matters to how we use them. Lawmakers should back policy designs that differentiate between emergency and retirement savings, so the first makes the second more possible and likely.

Iwry agrees.

“We could reduce leakage of retirement savings by explicitly separating and distinguishing short-term from long-term saving through separate ‘buckets’ or accounts,” he said. “Two accounts, each with different rules for accessibility, can help reassure people that in many cases their short-term needs need not preclude long-term saving.”

This is critical for people under financial strain, who are most likely to hesitate to make retirement savings contributions out of concern they need to hold on to their money for day-to-day needs.

Third, to bolster the retirement system, employers must help enable emergency saving beyond retirement plans.

Tens of millions of workers are not eligible for 401(k) plans, but one day many of them will be. To increase the likelihood they will save for retirement when their time comes, these workers need help building financial stability today. Employers have a key role to play, and policy can help – especially through enabling automatic enrollment into workplace emergency savings plans.

“Everyone ought to have a convenient, low-cost way to save for the near-term,” Iwry said. “Enabling short-term saving within retirement plans is by no means the only way. Depository institution accounts, payroll cards and other non-401(k) approaches are also promising and are being developed.”

By some counts, automatic enrollment has doubled retirement plan participation, and it could have the same impact on emergency savings. Congress played an important role in expanding the adoption of automatic enrollment in retirement plans, work that Iwry was central to.

“After first defining, approving and promoting 401(k) auto enrollment in Treasury guidance in 1998 and 2000, and seeing about a third of the larger 401(k) plans adopt it, in 2006 we were able to persuade Congress to give auto a further boost by inserting some helpful auto enrollment provisions into the Pension Protection Act of 2006,” he said.

A similar provision endorsing automatic “opt-out” enrollment into workplace emergency savings belongs in whatever legislation emerges from the current Congress.

Our retirement system is an enormous national asset for building household financial security, one enabled by public policy and brought to life through a world-class industry and close cooperation with employers. As Congress once again updates and improves the rules that govern it, it is vital lawmakers prioritize concrete ways to make the system work better for all.

Timothy Flacke is executive director of Commonwealth, a national nonprofit building financial security and opportunity for financially vulnerable people through innovation and partnerships to change systems.