How Emergency Savings Serves Low-Income Households

Low-income households with at least $1,000 in emergency savings were half as likely to withdraw money from their workplace retirement savings accounts during the pandemic, according to a study from BlackRock’s Emergency Savings Initiative, conducted in partnership with the Defined Contribution Institutional Investment Association’s Retirement Research Center.

The study underscored the importance of emergency funds as an important buffer to keep workers from depleting their retirement savings. What’s more, participants with insufficient emergency savings were 13 times more likely to take a hardship withdrawal than those with adequate savings, according to research from ESI partner Voya Financial.

In addition to their importance as a buffer, offering emergency savings paired with a retirement account encouraged retirement contributions. The findings from the ESI and DCIIA’s RRC indicated that those with emergency savings were 70% more likely to contribute to their defined contribution plan.

In conducting the study, the ESI observed strategies that increased participants’ adoption of emergency savings, including auto-enrollment for short-term savings programs. Programs that were active choice opt-out had a median uptake rate (43%) more than four times higher than those in which people had to pro-actively take action to start saving (10%).

In-product prompts to contribute to emergency savings, such as onboarding screens or savings questionnaires, also encouraged emergency savings. Adoption of these methods resulted in increased median uptake rates (39%) compared with interventions that relied only on email campaigns to nudge savings behavior (7%).

Additionally, interventions that targeted new employees had greater median uptake rates, at 39%, compared with projects that targeted existing employees or members, at 8%. The BlackRock report suggested this is likely because new users are less habituated and are at a prime moment for starting a new behavior.

The report also recommended that to expand emergency savings access, employees should be offered in-plan, after-tax options, as well as out-of-plan options. Yet more than half of the bottom quarter of earners, 58%, do not have access to retirement plans. Therefore, many employees, particularly those earning low incomes, need emergency savings options that are separated from a retirement plan in the manner of a separate account or a sidecar to their savings plan.

SECURE 2.0 retirement law contains two main provisions related to emergency savings, both of which are optional for plan sponsors starting in 2024. The first would permit the creation of a “sidecar” account tied to a participant’s retirement account. The second provision would permit participants to withdraw up to $1,000 in a year from their retirement account to pay for an emergency.  

The ESI also suggested policy changes to increase out-of-plan emergency savings options, given that among working Americans in the bottom quartile of earners, a majority do not have access to an in-plan retirement option.

“Public policy should further catalyze the innovation for out-of-plan solutions already happening in the private sector,” the report wrote. “This includes ensuring that savings options utilized by people earning low income—such as savings features on payroll cards or stand-alone savings accounts—benefit from future policy changes, like allowing for similar automatic enrollment into out-of-plan accounts.”

BlackRock’s Social Impact team launched ESI in 2019. The information in the report was drawn from projects conducted with multiple partners.