While employees who were able to work from home full time during the COVID-19 pandemic often saw their savings increase due to lowered expenses, those who were laid off or temporarily furloughed, or who had their hours reduced, weren't so fortunate. Those workers often drew down their savings and may have taken hardship distributions from their 401(k) accounts.
Often, however, workers found they had little savings to raid. New research from the nonprofit Employee Benefit Research Institute in Washington, D.C., shows that a typical family with a head of household who is working had less than one month's income worth of savings outside of a retirement account, and even the highest-income families only had 1-3/4 months of income available in liquid savings.
Benefits represent a significant portion of employees' total compensation, including opportunities to save for retirement or for health care expenses. Financial problems, however, can prevent employees from taking full advantage of these offerings.
Traditional benefits "assume a baseline level of financial stability," said Dani Pascarella, CEO of financial wellness platform OneEleven Inc. in New York City. "Employees [who] are in serious debt, living paycheck to paycheck or lacking an emergency fund typically cannot afford to contribute" to a retirement plan, for example.
A Meaningful Difference
Employees with financial stress and worry in their lives are more likely to be distracted and less likely to be productive than their peers. The good news is that emergency savings can have a material impact on someone's ability to deal with financial setbacks.
Research from AARP found that "liquid savings of at least $2,452 can meaningfully buffer low- to moderate-income households against financial hardship." Households with that level of savings at any point between 2013 and 2016 were significantly less likely to experience financial hardship up to three years later.
Case in Point
Helping employees avoid this type of financial stress was a driving force behind Richmond, Va.-based Alleghany Warehouse Co.'s decision to offer its 47 employees emergency savings accounts with a payroll deduction and higher-than-market interest rate.
The company credits interest at 5 percent on average balances at the end of each quarter up to a maximum of $200 per year. "This equates to an interest rate of up to 22 percent per year, well above anything you can find in the market," said Jeb Bryan, the company's president.
Alleghany Warehouse decided to go with this interest rate rather than matching contributions to discourage employees from spending money from the account for nonemergencies. The interest rate credit is based on the amount in the account at the end of the quarter, which creates a compelling reason to maintain a healthy account balance.
The quarterly reward is also a potential retention tool since employees will not receive their interest credit if they leave the company before the end of the quarter. For hourly employees, this could represent a significant financial bonus. "They have that potential incentive to stay with the company," Bryan said.
So far, half of the company's employees are contributing to these emergency savings accounts. Bryan noted that participation is particularly high among newly hired employees, making these accounts a useful addition to the benefits package when recruiting talent. In the future, he may tie the interest rate percentage to employee tenure to retain employees.
Bryan also expects to see real-time consequences in the workplace as employees set aside money for emergencies over time. "We hope that this will reduce the impact of an unexpected car repair or other financial emergency that might keep an employee from coming to work," he said. "On any given day, we could be down three to five employees, so any unplanned absence could be detrimental to productivity."
Once emergency savings accounts are in place, employers can keep tabs on utilization data to gauge their success, as Alleghany Warehouse does. This can include how much money employees have saved individually and the average account balance among all employees.
Retention levels among participating employees versus nonparticipating employees also can be an interesting piece of data to track over time.
A Defined Contribution Solution?
As the need for emergency savings accounts becomes more pressing, employers could see more options become available that tie these accounts to existing 401(k) plans, with contributions made using after-tax dollars for the emergency savings portion. However, "even with the level of interest so high, we have not seen widespread adoption [of emergency savings accounts] within a defined contribution retirement plan," said Dave Amendola, senior director with Willis Towers Watson in Stamford, Conn.
Some regulatory, administrative and compliance questions need to be answered first, he noted. For instance, in what are being called "sidecar accounts" to a 401(k) or similar plan, using a shared platform and administrator, "there are questions about whether those funds can be immediately withdrawn without restriction, and matching contributions could be restricted," Amendola said.
That's not stopping some employers from adopting this solution. Last year, for instance, global shipping provider UPS launched an emergency savings account program for its 90,000 U.S.-based nonunion employees, allowing participants to set aside after-tax savings in tandem with a 401(k) plan administered by Voya Financial. The after-tax account is a separate "sidecar account" that, according to UPS and Voya, is not subject to 401(k) restrictions on withdrawals.
However, employers that want to maximize participation by automatically enrolling employees in emergency savings accounts face some questions. For example, it is unclear how an employer would go about safely choosing the default investment for employee contributions, or even if investment options should be offered other than an interest-paying stable value or money market fund, Amendola said. "Then there is the question of whether automatic enrollment is appropriate for these accounts," he noted.
Until account policies and operations are sanctioned by legislation or regulation, employers should make sure they understand what vendors are offering when adding emergency savings accounts to existing defined contribution plans, as well as the potential issues that could arise.
Greater clarity could come at any time. Amid growing pressure to provide guidance on the treatment of student loan repayment plans, regulators moved much faster than anyone expected, given the popularity and need for these programs. Something similar may occur as the popularity and need for emergency savings accounts continue to grow.
Joanne Sammer is a New Jersey-based business and financial writer.