Financial Security First

Employers are increasingly focused on strengthening the financial well-being of their workforce. While retirement remains a critical benefit, it is often unattainable for many low-and moderate-income workers, in part due to other pressing financial needs. One viable solution to this problem has been gaining traction in the retirement plan space: emergency savings vehicles that can provide both financial cushion and peace of mind to participants.

Of respondents to BlackRock Inc.’s Read on Retirement survey, 64% agree they would save more for retirement if they had an emergency savings fund set aside—demonstrating the vital role emergency savings play in financial stability and impacting retirement planning. Retirement plan advisers must equip themselves to respond to this demand.

For many low-and moderate-income earners, accessing liquid funds is challenging. Research shows a significant portion cannot cover a $400 expense from savings alone. This financial insecurity makes planning for retirement seem impractical. How can these households strategize for long-term goals when immediate needs, even if relatively small amounts, are unmet?

Kathleen Kelly

In 2022, Congress laid out the crucial connection between emergency savings and retirement planning through SECURE 2.0 Act of 2022 provisions. By offering solutions outlined in SECURE 2.0, like the $1,000 emergency withdrawal plan amendment, employers can assist employees in managing unexpected expenses through their retirement plans. For plan advisers, in particular, integrating workplace emergency savings products with retirement plans can enhance participation rates, decrease leakage and improve retirement plan inclusion outcomes.

Now is the time for advisers to engage plan sponsors to collaborate and identify high-quality savings options to meet this pressing employee need. Advisers have an important role to play in introducing emergency savings programs to plan sponsors and taking proactive measures to establish these benefit programs, whether in- or out-of-plan, to serve the diverse workforce of these employers. When communicated and implemented effectively, retirement-linked emergency savings solutions foster a mutually beneficial environment in which employers and employees can thrive.

Improving Retirement Participation

While 73% of U.S. workers have access to retirement plans, only 56% participate. What’s more, the disparity in retirement account balances by income and race has increased over time, with white households holding double the median balance. Offering emergency savings vehicles can be a valuable strategy to connect with a diversity of employees and serve as their first interaction with the recordkeeper, fostering trust and familiarity with the retirement plan provider among a broader segment of the workforce.

Nick Maynard

The liquidity restrictions inherent to retirement plans add to the complexity of enrollment, which is at odds with employee liquidity needs. According to a 2021 survey by Commonwealth, 65% of retirement plan adviser respondents highlighted that offering an emergency savings solution contributed to enhancing the appeal of employers’ benefits packages. Among these respondents, 60% emphasized the significant advantage of reducing employee financial stress, while another 60% acknowledged the positive impact of increasing employee engagement with the retirement plan.

By offering a liquid emergency savings option, employers can support employees’ immediate financial needs and trust in larger financial systems while strengthening their connection to the retirement plan and the opportunity to maximize the match offered by the plan sponsor.

Reducing Plan Leakage

A notable trend many plan advisers observe is the frequent utilization of retirement plans as revolving credit for small amounts. The pandemic revealed that households with at least $1,000 in emergency savings were half as likely to withdraw funds from their workplace retirement savings accounts.

Studies indicate that individuals with limited or no emergency savings are more prone to taking 401(k) loans, hardship withdrawals, or pausing or reducing contributions to their retirement plan. By providing a separate emergency savings account, recordkeepers can help alleviate the need for retirement withdrawals or loans, ultimately reducing the number of individuals resorting to early withdrawals and closures of their retirement accounts.

Improving Inclusion Efforts Through New Offerings

The vast majority of Americans, including 81% of Black Americans, firmly believe that employers have a responsibility to offer solutions to increase employees’ financial security. Plan sponsors universally recognize the distinct financial needs of lower-income employees, underscoring the importance of tailoring financial offerings to different employee segments.

To promote inclusivity within retirement plans, advisers can offer guidance to plan sponsors on strategies designed to engage new employees. Research conducted by Commonwealth as part of BlackRock’s Emergency Savings Initiative suggests that small-dollar incentives ($10 to $25) improved the likelihood of employees who earn low and moderate incomes enrolling in an emergency savings program.

As workplace emergency savings programs continue to gain momentum, advisers must fulfill their role in offering solutions to meet the financial needs of diverse workforces. This proactive approach ensures employees have the tools and resources to navigate their financial journey today and tomorrow.

The types of emergency savings programs will, of course, vary by plan sponsor needs and provider options. But plan advisers can learn more about the potential for programs from BlackRock’s philanthropic Emergency Savings Initiative, Commonwealth directly and Compass Financial Partners.

Kathleen Kelly is managing partner in Compass Financial Partners, a Marsh & McLennan Agency LLC company; Nick Maynard is a senior vice president at Commonwealth.

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