Emergency savings accounts are viewed as the next benefit to
accompany workplace retirement plans, and most big record keepers are counting
on that, according to a report this week from nonprofit Commonwealth.
The Covid-19 pandemic has focused more attention to
Americans’ lack of rainy-day savings, with many turning to their 401(k)s for
loans and early withdrawals to cover emergency expenses. That need hasn’t gone
unnoticed by plan sponsors, some of which are considering in-plan or out-of-plan
emergency savings accounts to help their workers prepare for the unexpected.
Eight of nine big defined-contribution record keepers either
already offer emergency savings programs or are planning to, according to
Commonwealth, which included data from the Defined Contribution Institutional
Investment Association in its report. Two record keepers — Prudential and Voya
— provide those services as an in-plan option.
“When offering outside of the 401(k) plan, record keepers
may choose to partner with a financial institution or fintech, leverage an
existing account if the record keeper also offers banking or investing products
(e.g., cash management account), acquire a fintech or build a new solution
in-house,” the report noted. “The majority are leaning toward offering
out-of-plan solutions, though several said they would offer both in-plan and
out-of-plan solutions to meet plan participant and plan sponsor demand.”
Plan sponsors seem to like the idea, but not all of them are
queued up to add emergency savings accounts for their workers. Most of the
seven large sponsors Commonwealth interviewed said they have communicated with
employees about the importance of building emergency savings, and about half
have added or plan to add such accounts through their plan record keepers or
credit unions.
Plan sponsors said they had concerns about their fiduciary
role and whether it is appropriate to allow record keepers to cross-sell to
their employees. Some sponsors said they wanted employees to get the best
possible rates of return and pay low fees, according to the report.
Last year, 44% of sponsors told the Employee Benefit
Research Institute that they had interest in financial wellness services that
included emergency savings.
Amid soaring unemployment in 2020 caused by pandemic-related
shutdowns, some workers who were laid off or furloughed turned to their
retirement accounts to help them get by.
About 5% of all DC plan participants took
coronavirus-related distributions enabled by last year’s CARES act, with the
average size of the distribution ranging from $12,000 to $28,000, depending on
the record keeper, according to Commonwealth’s survey data.
Earlier data from the Federal Reserve found that 39% of
workers don’t have enough savings to cover a $400 emergency expense.
The success of emergency savings initiatives hinges on how
they can get workers to engage. Strategies like rewards programs and
gamification, which give positive feedback for good savings behavior, could be
effective, Commonweath noted.
What might be the most effective policy is using automatic
enrollment, just as many 401(k) plans already do, the group wrote. Providing
in-plan after-tax accounts allows employers to set up emergency savings
accounts using existing payroll services, but some record keepers said they had
concerns about the early withdrawal penalties participants would face if they
are younger than 59½. Conversely, out-of-plan options can be launched faster
and would be portable, according to the report.
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