Debunking 4 emergency savings myths held by RPAs

In the workplace, worker financial insecurity has been correlated with decreased productivity, increased turnover and absenteeism, and increased likelihood of workplace accidents. In response to both growing evidence around the business costs of financial insecurity and the severity of financial insecurity in the United States (made acutely evident by the Covid-19 pandemic), employers have increasingly focused on providing financial wellness benefits and tools to enable employees to save for emergencies.

Unsurprisingly, the companies that provide benefits to these employers, such as retirement record keepers, also are increasingly offering such products.

Commonwealth has been working toward making emergency savings tools ubiquitous in the retirement system. Over the last three years, we have partnered with record keepers and their employer customers on the design of innovative, practical product solutions. Now we have expanded our focus to include retirement plan advisers, who play a key role in supporting emergency savings.

Commonwealth recently partnered with NMG Consulting, which conducted a survey of 607 RPAs and interviews with 20 RPAs; we collaborated to include questions aimed at understanding their perceptions of emergency savings.

The surveys revealed several myths that are currently held about emergency savings in retirement plans by RPAs. Below we share the key myths uncovered through the survey and provide recent evidence-based insights about the state of emergency savings in the retirement plan industry. Further details on the research responses can be found here.

MYTH NO. 1

Plan sponsors are unfamiliar with both the concept of supporting employees in emergency savings and the available emergency savings products.

Reality: Plan sponsor and record-keeper interest in saving is, in fact, growing, and it has accelerated during the pandemic. Commonwealth research found that most top record keepers are determining how, not if, to offer emergency savings: eight of the nine record keepers interviewed as part of the research either offer or are planning to offer an emergency savings product.

MYTH NO. 2

Plan participants aren't interested in building emergency savings.

Reality: Interest in saving for emergencies and receiving employer support in saving for emergencies is actually a high priority among plan participants. In 2018, 71% of employees surveyed by AARP reported that they would be likely to participate in an employer-based rainy-day savings program.

MYTH NO. 3

Emergency savings don't help plan participants build long-term savings or retirement.

Reality: Emergency savings can protect retirement savings from loans or withdrawals.

Commonwealth research has found that emergency savings helps to protect retirement savings. In a survey of low- and moderate-income plan participants, respondents who had a significant amount of liquid savings (over $2,000) were half as likely to have taken a 401(k) loan or hardship withdrawal in response to the COVID-19 pandemic. Emergency and retirement savings are not mutually exclusive: building emergency savings can help support building retirement savings.

MYTH NO. 4

Emergency savings offerings are complicated and introduce an added cost for plan sponsors.

Reality: Neither in-plan nor out-of-plan solutions present a high cost to plan sponsors. Record keepers and plan sponsors increasingly see emergency savings options as a powerful way to reduce loan and hardship withdrawals and maintain employee retirement security. Leading record keepers such as Voya, John Hancock and Prudential all offer in-plan or out-of-plan emergency savings options.

NEXT STEPS 

To support plan sponsors and record keepers on emergency savings options, RPAs have a unique opportunity to get smart about this topic, learn about solutions and advise their plan sponsors and participants by using clear research-backed features and a criteria of quality “expense shock” emergency savings. These features include:
• Low or no fees for employees, with no barriers to entry or use, such as requisite minimum account balances.
• Liquid and easily accessible funds so that employees can withdraw them as often as they face emergencies. Portability between employers so that employees can continue to use and contribute to the account if they leave an employer.
• Automatic payroll deduction, such as after-tax contributions that are deducted automatically from a plan participant’s paycheck each pay cycle.

RPAs can also advise plan sponsors on devising options to match both emergency savings and retirement contributions. Where possible, plan sponsors have the opportunity to match employees’ after-tax contributions with employer pretax contributions as well.

The retirement industry is well on its way to offering emergency savings as a key feature of workplace retirement plans. RPAs have an opportunity to join in and support plan sponsors in preparing plan participants to save for emergencies, as well as prepare for income and expense shocks in the short term and build resilience, savings and retirement in the long term.

[More: Interest in emergency savings accounts likely to grow post-COVID-19]

Nick Maynard is a senior vice president at Commonwealth, a nonprofit organization that works to build financial security for financially vulnerable people. Chris Bailey is principal consultant at NMG Consulting, a consulting firm focusing on the wealth, asset management and reinsurance markets.