Emergency savings accounts are expected to boost plan sponsors’ retirement plans. A number of major record keepers are counting on this new feature to help ease the economic uncertainty faced by employees.
The pandemic has put a spotlight on the average American’s lack of savings. Thus, a large number of workers have turned to their 401(k)s for loans and early withdrawals in order to cover emergency expenses. According to different surveys, more than a half of Americans are not saving enough. That lack of savings hasn’t gone unnoticed by plan sponsors, who are thinking of in-plan or out-of-plan emergency savings accounts to help their employees prepare for the unexpected.
Some experts predict that the economy will not make a full recovery until the end of 2021. Others consider that the recession will get even worse and many companies have already cut back on their employees’ retirement packages during the first months of the pandemic.
Most big DC 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.
According to the report: “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.”
It went on: “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.”
The Reaction from Plan Sponsors
Plan sponsors apparently like the idea, but some are hesitant about adding emergency savings accounts for their employees. Most of the seven large sponsors Commonwealth interviewed said that they had discussed with their workers the importance of building emergency savings, and about half added or are planning to add such accounts through their plan record keepers or credit unions.
Additionally, plan sponsors said they had concerns about their fiduciary role and whether it was appropriate to allow record keepers to cross-sell to their employees. Some sponsors said they wanted their workers to get the best possible rates of return and to 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.
The Reaction from Workers
In the midst of pandemic-related shutdowns and a growing rate of unemployment throughout 2020, some employees who were laid off or furloughed turned to their retirement accounts to help them get by.
About 5% of all defined contribution 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 depends on how they can attract plan sponsor employees. Such strategies like reward programs and gamification, which give positive feedback for good savings behavior, could be effective, Commonwealth noted.
A lot of 401(k) plans are already using automatic enrollment which might prove effective. 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 plan participants would face if they were younger than 59½. However, the opposite might be true, out-of-plan options could be launched quicker and would be portable, according to the report.