Next to healthcare, most people immediately think of retirement savings when they think about employee benefits.
According to the U.S. Bureau of Labor Statistics, 67% of American workers have access to retirement savings benefits like 401(k), 403(b), and pensions. And with state-facilitated retirement programs like VirginiaSaves on the rise, that access is bound to increase.
But while employees might be gaining more access to retirement savings benefits, many continue to struggle with more immediate financial needs, resulting in lower 401(k) participation and more hardship withdrawals and loans. This is especially true in the service sector where workers are disproportionately women and minorities, and earn lower wages across the board.
Employers consider retirement savings as a key pillar of their compensation and benefits strategy, designed to attract and retain people. But if these people don’t participate or continue to take out money, is it working?
One solution to the problem is to offer workplace emergency savings plans in addition to retirement savings benefits. This powerful combination bridges the gap between employees’ immediate financial needs and their future financial goals. At Sunny Day Fund, we believe this benefit serves as a “muscle builder” for saving behaviors and drives employee retention.
Where retirement savings fall short
At first glance, it would seem that retirement savings programs benefit all workers.
After all, almost everyone retires one day, no matter their different life journeys. That’s why offering a 401(k) benefit – which, for the purposes of this article, includes similar programs like 403(b), SIMPLE IRA, etc. – is a top priority for most employers as a way to attract and retain employees. But, when we dig in, significant gaps arise about who is participating and who is making the most premature withdrawals.
Let’s first acknowledge that nearly 50 million Americans lack retirement savings as a benefit.
And most people are focused on immediate financial needs, even though they acknowledge retirement is important. According to AARP, eight in ten (83%) workers say that it is very important to them to be financially secure in retirement. However, only one in three (34%) say that they are very likely to achieve this because they lack money and have urgent near-term expenses.
There are also 401(k) gaps when it comes to race, ethnicity and income. The Employee Benefit Research Institute’s (EBRI) 2021 Retirement Confidence Survey: A Closer Look at Black and Hispanic Americans found that actual total retirement savings and investments are very different between different racial and income demographics, as we covered in a prior blog.
For these employees, making ends meet (including things like a car breaking down or a family medical emergency) is more pressing than retirement savings.
And for many, the need for emergency savings has only been heightened by the global pandemic.
Consider David Bakke, a freelance blogger, who had $6,000 saved before the pandemic. COVID not only hurt his business, but a surprise air conditioning repair cost him $3,000.
“[My emergency savings] was a little low to begin with,” he said. “Now, it’s almost nonexistent.”
The situation only worsens for those with lower incomes. Bankrate found that, after the pandemic, 75% of those with incomes below $30,000 a year were somewhat or very uncomfortable with their emergency savings. 39% of these lower-earning households had no emergency savings at all.
Unexpected emergencies also damage 401(k) progress. During COVID, “nearly one in four (23%) prematurely dipped into their retirement savings or stopped contributing altogether during COVID,” according to AARP.
And according to Sunny Day Fund research, most organizations we’ve spoken with said that about 20-30% of their plan participants have 401(k) hardship loans or withdrawals – a statistic that’s again more pronounced in lower-income and minority populations (similar to EBRI’s findings).
To put this concept of hardship withdrawal into perspective, meet Emily – one of over a thousand employees we’ve talked with to understand the impact of financial emergencies.
Emily works in a regional clothing manufacturing warehouse. During a recent family health emergency, she needed to come up with $1,500 but couldn’t pull together this amount from the money in her bank accounts or family and friends.
So she turned to her 401(k), to which she had carefully contributed over several years. The $1,500 withdrawal represented nearly half of her entire retirement savings, and it turned into a little less than $1,000 after penalties, fees, and taxes. The process itself was arduous, with stressful emails and approvals from multiple people who now knew about her situation.
By dipping into their 401(k) early, people like Emily are left without enough to cover their emergency and they lose what they had in retirement savings. The vicious cycle continues.
As an employer, it’s easy to assume that a 401(k) alone is enough to attract and retain talent. Unfortunately, that’s not the case for a lot of hardworking Americans. But there’s an opportunity to bridge the gap by combining the 401(k) with a workplace emergency savings program to most effectively engage and support your employees.
What are workplace emergency savings programs?
Workplace emergency savings plans are programs sponsored by employers to help employees build unrestricted, easy-to-access savings. Ideally, it falls outside of traditional ERISA plans, and represents a win-win option for employees and employers alike.
Think of it this way: a 401(k) is a “set it and forget it” financial benefit – the goal of the money in a 401(k) is to grow over time. Emergency savings, on the other hand, is a “set it and tap it” benefit – the goal is to easily access the cash in case of emergencies, rather than the 401(k).
Both 401(k) providers and researchers agree that combining a 401(k) with a workplace emergency savings benefit is both effective and sustainable. For example, according to a study released in July 2021, by a research collaboration between Aspen Institute’s Financial Security Program, Morningstar, Defined Contribution Institutional Investment Association, and NORC at the University of Chicago , “households with at least $1,000 in emergency savings were half as likely to withdraw from their workplace retirement savings account.”
Let’s go back to the example of Emily withdrawing from her 401(k) to cover a $1,500 emergency. Instead of dealing with burdensome withdrawal penalties and lag time accessing her 401(k) funds, she uses her new emergency savings and preserves her retirement assets.
You may be asking – does this mean that Emily is now contributing less to the 401(k)? No, Emily says she’d contribute at least $20 per weekly paycheck to a workplace emergency savings program, on top of her retirement contributions. This behavior is supported by what we’re actually seeing with users at Sunny Day Fund. Read out our post on the Child Tax Credit about the macroeconomic tailwinds that’re enabling people like Emily to do so too.
And let’s not forget – tapping these emergency savings is way less stressful, time-consuming, and intrusive than a 401(k).
This is excellent news for your organization because you have a new, impactful lever you can easily pull to help your company save money. According to SHRM, 80% of employers report that financial stress is lowering their employees’ performance level, and it’s costing them nearly half a trillion dollars annually. You and your employees literally save when your employees contribute to emergency savings!
In addition, not only are employees becoming financially stable (and dealing with less financial stress), employees are regularly reminded that their employer truly understands their needs. This increases employee retention and reduces turnover costs for you as an employer.
The vast majority of employees are already on board. In fact, 9 in 10 working adults actually support workplace emergency savings as a benefit from their employers. Through a program like Sunny Day Fund, there are also no barriers for contributing to emergency savings so low-income workers can participate. This serves to further close the gap on 401(k) participation.
How to implement these plans and track success
Start by measuring the financial well-being of your company through a financial well-being survey before the program is rolled out, which you can do easily with Sunny Day Fund’s Sunflower™ tool.
The results of this survey help you understand where your employees are struggling financially and what emergency saving goals make sense; all of which inform proper communication of a new workplace emergency savings program.
Create a customized workplace emergency savings plan, or start with one of our recommendations, that considers workforce-wide strengths and opportunities for improvement. Critically, ensure this program is considered “out of plan” or outside of ERISA so that the funds remain unrestricted for employees like Emily who need easy access in case of emergencies.
Next, set up a simple payroll deduction that allows employees and employers to automate contributions into standalone FDIC-insured savings accounts with no minimums or penalties.
Offer incentives for employees to save. Over Sunny Day Fund’s Sunshine™ platform, employers typically reward up to $200-$600 per year per employee – and have used these rewards as an additional way to differentiate themselves in a crowded labor market.
At the end of the year, run the financial well-being survey again. Compare original survey results or the financial snapshot with current employee finances. You can also check your ROI to see how your company has benefited.
Go beyond the 401(k) as a financial benefit
A workplace emergency savings plan isn’t designed to replace the 401(k). It’s there to build the muscle for saving and protect retirement savings. It’s structured so that earners of all income levels and backgrounds can access the program, supporting a more effective, inclusive financial benefits strategy to attract and retain talent across the organization.
You can enable your employees to create a safety net for themselves to overcome immediate financial challenges and achieve pre-retirement life goals. Once emergency savings are in place, these employees are equipped to also save for retirement more sustainably.
Want to help your own employees save and improve their financial well-being? At Sunny Day Fund, we offer a customizable employer-rewarded savings program to help you engage your employees. Reach out to us at email@example.com and ask about our workplace emergency savings plans.