The events of the past year have reinforced the importance of being financially prepared for unexpected emergencies. Retirement Director Ben Rizzuto discusses some of the options – both inside and outside of retirement plans – that are available for plan sponsors and business owners to help employees build up adequate savings.
If anything positive came out of 2020, it’s the fact that the challenges we’ve faced over the past year gave us the opportunity to take a step back and consider what is truly important. After seeing so many people’s lives turned upside down by the pandemic, many of us have placed a greater focus on our health, priorities and financial stability. As a result, many plan sponsors and business owners have had to reconsider what benefits and savings vehicles their participants and employees need.
The emergency fund is one of the foundational ideas in financial planning. It doesn’t matter who you talk to or what book you read – virtually every personal finance source stresses the fact that people should have enough money set aside to cover unexpected life events … and 2020 certainly highlighted the importance of this.
While the emergency fund is one of the cornerstones of financial advice, it is something very few people take the time to set up and fund. In fact, according to the U.S. Federal Reserve, nearly four in 10 American households cannot come up with $400 in a financial emergency.1
This startling statistic – along with the economic turmoil the coronavirus pandemic continues to impart on businesses – has caused more plan sponsors and businesses to think about how to help employees put money into an emergency fund. Employers are in the perfect position to do this since their payroll systems can easily link to retirement plan savings options or options outside the plan.
Of course, the easiest way to save for an emergency would be for people to simply put money aside on their own. Aside from educating employees on the importance of budgeting and saving, how might businesses owners help? There are two options to consider: The after-tax bucket of the employee’s 401(k) account or one of the growing number of fintech solutions that are now available outside their retirement plan. Let’s take a closer look at both options.
After-Tax/In-Plan 401(k) Option
When we think and talk about our company’s retirement plan, we often focus on the traditional, tax-deferred side of the plan and the tax-deferred contribution limit ($19,500 for 2021). However, it’s important to remember that the total annual amount someone can put into a 401(k) account is $58,000. That amount can be made up of pretax contributions by a participant, matching contributions made by the employer and after-tax contributions.
To utilize the after-tax bucket, a plan must first allow these types of contributions. There may also be a limit on the amount of contributions due to discrimination testing. But if a plan allows for after-tax contributions, the amount an individual could put in would certainly be enough to deal with emergencies.
It’s important to note that while these contributions are after-tax, employees must pay tax on any earnings from withdrawals, and there is a 10% penalty if they are younger than 59½. But while the tax implications are not ideal, many companies have found that this may be the only way to get people to think about setting aside emergency funds – and some have made efforts to make it a more attractive option for their employees.
One example is MGM Studios. The company had, for several years, offered participants the ability to make after-tax contributions to the plan. The adoption rate for this option was low, however, largely because participants were increasingly taking loans for small dollar amounts due to unexpected situations.2
To help alleviate this problem, MGM and its record-keeper rebranded its after-tax contribution feature as an “in-plan emergency savings solution,” which proved to be much more relatable for employees. The feature allows individuals to save anywhere from $500 to six months’ worth of expenses, depending on their income and goals. Assets can be invested in low-cost investments such as money market or stable value funds, which aim to preserve capital and minimize potential taxable gains. Should an emergency occur, participants can contact the record-keeper to request a withdrawal. And unlike a traditional plan loan, they do not have to pay back any of the money they withdraw from their emergency savings.
Along with MGM, we recently saw that UPS set up a similar program for its employees. Both cases suggest that more companies are starting to acknowledge the fact that the financial security of their employees is an important element of not only employee success in the workplace, but also the company’s own success.
There’s an App for That
Another emergency savings option that is available is one that exists outside the retirement plan. There are a growing number of solutions from technology companies that can work alongside or instead of a retirement plan to help employers help their employees save for unexpected expenses.
These platforms function as an extension of a company’s payroll system. Most offer an app that allows employees to see how much they’ve saved and also provides quick, easy access to those funds when emergency expenses arise. From a setup standpoint, they are very much like Health Savings Account platforms that businesses may be using, and typically have a per participant/per month fee plus a one-time setup fee.
One such provider is Secure, whose CEO and co-founder, Devin Miller, I spoke with recently. When a business partners with Secure, employees can specify a dollar amount they would like to defer from each paycheck into their emergency savings account. Along with that, businesses can choose to give employees a sign-up bonus and then match savings. Interestingly, the sign-up contribution does not have to be a significant amount: An employee can sign up with as little as $25. By matching contributions (for example, every $10 up to $200), companies can then offer little “carrots” to help employees, as Miller says, “start the habit and then keep the habit.” In fact, AARP found that an employer match makes 87% of employees more likely to participate in these types of programs.3
For example, Alorica, a company in Bluefield, West Virginia, that partners with SaverLife, offers employees a $20 sign-up bonus and then matches employee contributions up to $40 per month. Employees must save at least $10 a month, but after six months, an employee who saves $240 will end up with $500.4
These behavioral nudges are important to get things going, and fintech solutions can also sprinkle them in throughout a user’s experience within the app. It could be as simple as a message saying, “You’re halfway to your goal amount of $2,500!” They can even be more customized based on the employee’s specific situation. For example, if an employee needs to access funds in an emergency but doesn’t have enough in their account to cover the expense, the app can point the user to resources available through the employer, such as hardship funds, or suggest that the user consider taking a loan from their retirement account. These nudges help to remind participants what is available and allow a company’s HR or Benefits team to have a conversation with employees so they can make the best decision possible.
It’s important to remember that people act with regard to their financial plans most often as a result of life events. These events, both large and small, can involve unexpected losses and are likely to cause a financial redirection.
In the case of Secure, the platform is there for what Miller called “micro life events.” These are situations where an employee needs a few hundred dollars for a new refrigerator or unexpected car repairs, for example. While these costs may be a drop in the bucket for many, for the 40% of Americans that can’t come up with this money – usually lower-income employees – these events can quickly derail things financially. That’s why having an easy way to save and access funds for emergencies is so important.
What’s noteworthy for business owners is that these types of emergency savings accounts may serve as an alternative starting point when thinking about helping employees save. Businesses that have a retirement plan are generally quite large and well established. In fact, only 28% of businesses with fewer than 10 employees offer retirement plans for employees, whereas 51% of businesses with 10 to 24 employees and 63% of businesses with 25 to 49 employees offer retirement plans.5 This type of solution might provide a lower-cost starting point to help employees save for emergencies or for retirement, allowing businesses to provide another attractive benefit and providing employees a way to build a financial foundation.
Even though 2020 is over and there may be light at the end of the tunnel, the stress that went along with it hasn’t disappeared. Cities and states and the businesses within them are still being affected by the pandemic, and this continues to put employees in precarious positions.
If nothing else, 2020 taught us how important a sense of control and peace of mind can be as we go through our lives. Whether it’s within a retirement plan or outside of it, an emergency fund savings option can be an easy way to help employees in these difficult times. Research from Commonwealth found that people with emergency savings were half as likely to spend their retirement savings during the pandemic.6 Plus, having these funds available can help decrease stress, increase confidence, and potentially improve an individual’s short-term and longer-term financial health.
1Federal Reserve. Report on the Economic Well-Being of U.S. Households in 2019 - May 2020.
2CNBC. “This workplace perk could make it easier to save for emergencies.” January 26, 2019.
3AARP. “Saving at Work for a Rainy Day: Results from a National Survey of Employees.” September 2018.
4MarketWatch. “SaverLife Announces Expansion of Saving Program Across Six U.S. Intuit Prosperity Hubs in 2021,” October 27, 2020.
5Plan Adviser. “Small Business Owners Need a Nudge to Offer Retirement Plans.” April 2019.
6Commonwealth. “Saving Through a Crisis: LMI Plan Participants’ Financial Strategies During COVID-19.” September 21, 2020.