The past year tested the financial security of many American families. Unfortunately, we were reminded that many Americans aren’t prepared to deal with an unexpected financial challenge as cash-strapped families turned to their retirement savings to make ends meet.
This underscores the need to enhance America’s financial resiliency through improvements to the retirement system that make it easier for hardworking Americans to access short-term emergency cash while helping them secure their financial futures by boosting participation in workplace retirement plans.
That’s why I’m excited about a new bipartisan emergency savings proposal introduced by Sens. James Lankford, R-Okla., and Michael Bennet, D-Colo. I was proud to be with Lankford at the recent 1921 Tulsa Race Massacre Centennial Commission’s Economic Empowerment Day event, where we discussed this legislation and how it will empower savers by leveraging retirement plans to help families facing a financial emergency.
If passed, the proposed legislation would allow employees to withdraw up to $1,000 from their employer-sponsored retirement account once a year without penalty. Employers will have to elect for this feature to be added to their plan. Based on my experience serving retirement plan sponsors of all sizes, I expect many will embrace this opportunity.
The emergency withdrawal is subject to income tax, but there is no penalty for early distribution. Those who access emergency funds would be required to repay any existing withdrawals before taking another emergency withdrawal.
Through the 2020 CARES Act, Congress recognized Americans needed to access a portion of their retirement accounts to address Covid-related emergency needs and it appropriately waved the 10% tax penalty on early distributions.
Early withdrawals should always be a last resort. However, when a family is in financial peril and needs to borrow from their retirement account in an emergency, they shouldn’t face an extra tax burden.
The legislation proposed by Lankford and Bennet recognizes the unfortunate fact that today millions of Americans cannot afford a $400 emergency expense. Their bill would allow those who need an urgent car repair, a quick fix to their water heater or an emergency room visit to access their money to cover these costs without penalty, while staying on track for retirement.
When speaking with retirement savers we serve, particularly lower-income workers, we often hear that they're reluctant to participate in their workplace retirement plan because they're afraid they won't be able to access their money in the event of an emergency. By removing that obstacle, this legislation has the potential to boost participation.
A recent Nationwide Retirement Institute survey found 94% of advisers and financial professionals agree emergency savings access of this nature would help improve Americans’ financial security. I strongly believe it will.
By providing more employees with financial flexibility and opportunities to save for retirement, we can create a more financially resilient country and help more people save and stay on track for retirement. I strongly encourage lawmakers to enact this proposal and consider including it as part of the SECURE Act 2.0 legislative effort.
Eric Stevenson is president of Nationwide Retirement Solutions, which provides 401(k), 403(b) and 457 plans across the country.
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