Can Facilitating Emergency Savings Through the Workplace Improve Financial Security?
Despite an economy that appears to be doing quite well by most major measures, many Americans, particularly households of color, regularly live in a state of financial insecurity. According to the Federal Reserve, half of Americans would not be able to come up with $400 dollars to pay for an emergency without borrowing. Over two-thirds of Black and Latino households are liquid asset poor, which means they cannot cover basic expenses for three months when they face a loss of income due to a financial crisis. Many different factors contribute to this financial instability, including low and stagnant wages, irregular work schedules, insufficient safety net programs, predatory financial products, tax system and misguided federal policies that discourage savings.
Employers have a front row seat to these problems that many of their employees are experiencing, and some of them have begun to take steps to help remedy this for good reason. Workers bring their financial stresses into the workplace—30% of workers say that personal finance issues are distracting at work, and 22% say that these financial worries affect their productivity. Seventy-three percent of employees list making ends meet as one of their top financial concerns.
At Prosperity Now, we’re doing a lot of thinking around opportunities in the workplace and how to help families improve their financial wellness. In a partnership with Center for Social Development out of Washington University in St. Louis, Prosperity Now recently published Workplace Financial Wellness Services: A Primer for Employers to help employers think about how best to serve their employees with some common financial wellness services.
Employers have a role to play in helping their employees get on a path to financial wellness—increasing productivity and lessening financial stress. Many already offer financial wellness programs or services, but new bolder innovations are starting to emerge as well. One recent innovation that is getting a lot of buzz in policy and business circles is around what are called “Sidecar” savings accounts. Many employers already offer their employees a retirement savings or 401(k) program. What if they could use that same platform to help their employees save for emergencies as well?
Pulling savings out of a 401(k) before retirement can be cumbersome and comes with a steep penalty. Other families don’t even participate in these programs, because they are struggling just to make ends meet and retirement is just too far off to consider now. We already know that savings can reduce financial volatility, build wealth and enable economic mobility. Even just a few hundred dollars available at the right time can prevent a family from getting stuck in a long-term debt trap such as through payday loans. Facilitating emergency savings through the workplace, if done correctly, could be a win-win for both employers and their employees.
There are actually several different ways that employers can offer emergency savings paired with retirement savings through the workplace, each with their own advantages and disadvantages. The Sidecar savings account is also known as the Sidecar IRA—informal names for the little known Deemed IRA, which was created in 2001 but has been underutilized. A Deemed IRA can be either a traditional or Roth IRA that is offered by a workplace retirement plan sponsor in conjunction with a 401(k). If the Deemed IRA is a Roth IRA, any contributions can be withdrawn at any time penalty-free. Therefore, it can effectively function as an emergency savings account that is separate from the 401(k) but connected to the workplace plan for the ease of funding and administration, along with employee convenience.
Offering a product that allows employees to save for emergencies, while at the same time save for retirement, could relieve employees of the stress that comes with not having short-term savings while having them save for the long-term. It can build on the infrastructure of the 81% of organizations who offer retirement services. To make it easier for workers, other behaviorally-informed features and design factors for the account, such as automatic account opening, automatic contribution escalation and matched savings incentives, could be included. With the right design, this product could make it easy for low- and moderate-income workers to save for both their long-term and short-term priorities in the workplace and improve their overall financial wellness.
As previously mentioned, the Sidecar IRA is just one of several options for offering emergency savings in the workplace. There are a variety of administrative, regulatory and design questions that still remain to be explored for all of these options. However, the concept does hold some strong promise and has already started attracting some great preliminary thinking and exploration of the concept by policy and business interests. This exploration is also not just limited to the United States—the United Kingdom is also looking into the overall concept.
Prosperity Now will be exploring this topic further in an upcoming report to be released this fall. Stay tuned for more to come on this exciting innovation!
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