The COVID-19 crisis has exposed issues and opportunities within workplace savings. Four in 10 Americans cannot come up with $400 in an emergency, according to a 2019 Federal Reserve Study. That lack of savings is increasing reliance on defined-contribution plan loans and distributions, stressing an underfunded retirement system.
Enter emergency savings accounts, especially as after-tax sidecars to DC plans.
While worksite retirement platforms are largely seen strictly as a way to save for retirement, many industry professionals, fintechs, plan sponsors and some legislators share an expanded view, said Tim Rouse, executive director at the Spark Institute.
“Retirement is part of an employee’s overall financial well-being,” Rouse said. “Emergency savings fits into that picture.”
Prudential Financial, a leader in the financial wellness movement, was one of the first to launch an emergency savings program, doing so in July 2018. MassMutual followed, partnering with Millennium Trust in January.
Though just 20 to 30 of Prudential’s clients are currently using that firm’s program, there will likely be more demand in the wake of the COVID-19 crisis, said Harry Dalessio, head of the company’s retirement plan services group. Within that program, contributions average 4%, with stable-value investments accessible through online withdrawals, according to the company.
Commonwealth, a nonprofit founded 20 years ago that recently received funding from BlackRock’s Emergency Savings Initiative, is working with regulators and providers to develop viable options.
It makes sense to offer emergency savings as part of a DC plan, just as it does to provide help with student loans. Retirement, or more aptly, financial security, is the goal. 401(k) and 403(b) plans are just part of the solution, augmented by tools to help people save and spend more wisely. Not only does an emergency savings option benefit workers, but employers realize it can also be a great recruiting tool.
High-net-worth and mass-affluent investors use traditional advisers for hands-on, one-on-one financial planning. But the vast majority of the 90 million DC plan participants do not have enough assets for this time-intensive method to make sense. That shows the need for financial wellness, which has met with great demand from DC plan sponsors, although most programs do not result in significant behavior change. Most advisers offer it as a prospecting tool – show and go.
And while people are much more likely to save for retirement at work than on their own, it took automatic plan features to really move the needle on increasing participation, deferrals and smarter investing.
Emergency savings, as a sidecar feature to a DC plan, would help. And automatically enrolling employees in emergency savings accounts would create immediate and impactful results, while limiting the need for and use of loans.
What is it going to take to implement emergency savings for more Americans? For record keepers and retirement plan advisers, there are three reasons to offer new features in a plan:
1. Increased revenue
2. New laws
3. Competitive advantage and client demand
Emergency savings fall into the third category, and that could give financial wellness real meaning.
“There are lots of financial wellness programs,” Millennium’s Kevin Clark noted. “Emergency savings could provide an actionable solution.”
Shlomo Benartzi, a professor at UCLA Anderson School of Management, presciently wrote in February about the need for emergency savings in a Wall Street Journal article. He suggested behavioral tools to help such programs:
• Make it easy: Auto-enroll, or at least require people to make decisions.
• Windfalls: Use bonuses or raises and incentives, as well as employer matching.
• Positioning: Frame contributions in smaller amounts, like $10 a week, rather than $520 a year.
There are impediments, like state anti-garnishment laws, although legislation sponsored by Sen. Doug Jones, D-Ala., would help, and is bound to get more attention. Access to emergency savings is still clunky within DC systems, which are not designed for quick withdrawals as bank accounts are.
This current crisis highlights the need to help Americans prepare for a financial crisis by enlightening them on saving and spending habits. Employers want to help their workers for many reasons, as evidenced by the interest in financial wellness, even with such programs' limited results. 401(k) loans are not the best solution to help people in an emergency.
DC record-keeping platforms that offer payroll deduction and set-it-and-forget auto features are the ideal way to increase emergency savings options.
Financial wellness is a just buzz word without real action. Enlightened retirement plan advisers see the convergence of retirement and wealth, focusing on participant services.
Emergency savings options are sure to gain interest after this crisis. They will be a great way for advisers to offer something unique and actionable to plan sponsors, as well as engage with employees – perhaps finding new financial planning and wealth management clients in the process.
Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’ Retirement Plan Adviser newsletter.
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