Two events are happening simultaneously, which is causing concern. The first is the unstable nature and effects of COVID on the job market, which are creating income gaps and uncertain income streams. Second, Americans are less likely to have access to emergency funding or have considered it as part of their retirement savings.
There are policy options that workers can use to help them save for emergency situations and give them some financial protection in case of an emergency. The Aspen Institute has released a report entitled Moving from experimentation to the Mainstream – Policy Options to Automate Workplace Emergency Savings, offers solutions that can eliminate or lower barriers to automatic workplace savings. These solutions can be made available to workers regardless of where they work or what they get paid.
Emergency savings are different than long-term savings because they are intended for unexpected expenses during difficult times. The Aspen Institute recommends the following features for a workplace emergency savings plan:
Auto-enrollmentWorkers should automatically be enrolled and have their pay deducted to an emergency savings plan. There are options to opt out or cancel the deductions. However participation doubled when auto-enrollment became available in 401(k). Participation increased to 91% with new hires and also increased participation among younger, lower-income workers and women.
Automated replenishmentYou should be able replenish your emergency savings account (after you use it) by recurring paycheck deductions.
AccessibilityWorkers should have unlimited access to their emergency savings account and no penalty for withdrawing funds.
LiquidityThe funds should not fluctuate in price and should be easily liquidated when needed. This protects employees in the event that they require the funds at the same moment as a market decline.
Low or no feesSavings can be eroded by high fees on 401(k), or other investment funds. Employees who require emergency funds for their family should be offered accounts that have no or low fees.
Designed for mental accountingIt is better to save emergency funds in a separate account than in a bundle with other accounts. This is because it allows for mental accounting (a term used by behavioral scientists to describe how people assign their money). Savings are more likely to be used for their intended purpose if they are divided up.
Although the idea of employee savings or accounts for emergency situations has been relatively unknown, some workplaces have adopted it and are creating three types of plans.
Retirement-linked emergency plansThese accounts, also known as sidecar or in-plan accounts, are managed by a retirement plan provider. The accounts are integrated with the retirement plan and can be accessed through the existing infrastructure. These emergency plans can have tax consequences if they are withdrawn as they are linked with retirement plan savings accounts.
These plans are used by Maryland$aves, UPS, and Prudential as examples.
Bank-based emergency savingsBank-based savings accounts are managed through a depository account at a bank or credit union. They are FDIC-insured and governed by banking regulations.
MassMutual and Pitt Ohio are two examples of companies that use these plans.
Payroll card emergency savingsA third option is to use a debit card, such as a payroll card, to save emergency money. A payroll card holds the payroll of employees and allows direct deposit to a bank account. You can use a payroll card to deduct some income from employees for emergency savings.
The AARP is an example of a company that uses this saving method.
There are regulatory barriers that prevent auto-enrollment in three types workplace emergency savings plans. According to Aspen Institute, policymakers will need to take steps to ensure that auto-enrollment is available in all workplace savings plans.