401(k)s are never far from most employers’ lists of effective retention strategies. And with good reason. 401(k) matches and similar retirement savings benefits such as 401(a) and 403(b) help employees save for long-term retirement goals.
And as covered in SHRM, the tax benefits of saving through these programs keep increasing – for example, employees can now contribute up to $20,500 tax deferred to their 401(k) in 2022.
But while essential, a 401(k) can’t stand alone. Three-quarters of American workers don’t have three months’ worth of savings for immediate financial needs, according to the Federal Reserve. It’s especially a problem for frontline workers such as certified nursing assistants (CNAs) and warehouse workers. These employees need accessible savings to manage their immediate financial goals in order to successfully achieve their retirement goals.
In short, we must care about people’s future tomorrow as much as their future 30 years from now. Organizations need to supplement the 401(k) to address the immediate financial needs of workers, help them save, and level the playing field for benefits participation. This approach can bridge the savings gap and reduce turnover.
1. A 401(k) can’t support employees’ short-term financial needs.
Employees, especially frontline, are more stressed than ever with immediate financial problems. This stress harms their productivity, and also increases their likelihood of quitting. A 401(k) can’t offer relief because it’s not designed to provide short-term savings.
Immediate financial needs/concerns for frontline workers include:
- High transportation costs
- Healthcare costs
- Debt such as credit cards
- Childcare costs
At Sunny Day Fund, we talk with many employees about their immediate financial needs — and concerns about retirement.
Take one frontline worker at a logistics company – for the purpose of this article, I will call him Trey. Before Sunny Day Fund, Trey hesitated to participate in retirement savings, especially because he felt he couldn’t count on that money if something went wrong.
When Trey learned of Sunny Day Fund and that his employer would reward his savings without any restrictions on the money, he waded into the waters with a small contribution. A few months later, a $560 financial emergency came up – thankfully, he was able to lean on his own savings with Sunny Day Fund to overcome it. Having seen the power of these savings, Trey increased his Sunny Day Fund contributions and began his 401(k) – because he finally felt safe to save.
Fifty-five percent of employees cite lack of money, and 44% say that debt payments are the top barriers to saving more for retirement. Because of these issues, only one in three (34%) employees say that they are very likely to achieve a financially secure retirement.
Crushed under the weight of financial pressures, they are also more likely to leave their employer chasing signing bonuses, and searching for better, high-paying opportunities.
This turnover comes with a hefty price tag for companies. The cost of employee turnover is conservatively estimated to be roughly ⅓ of an employee’s $36,000 annual income, or $12,000.
2. Participation in 401(k) programs isn’t equal for frontline and younger employees.
At first glance, it may seem all demographics have equal opportunities to retirement savings. According to the U.S. Bureau of Labor Statistics, 67% of American workers have access to retirement savings benefits like a 401(k), 403(b), and pensions.
But a further study shows high income and racial disparities with 401(k) balances, especially among Black and Hispanic workers.
EBRI’s 2021 Retirement Confidence Survey found that 45% of all low-and-middle-income workers have less than $1,000 in savings, and it was worse for people of color. Combined with steep expenses, income gaps are a large reason for the wealth divide with non-frontline employees.
Frontline workers such as CNAs, warehouse workers, and retail associates are essential. And yet they are consistently overworked and underpaid. More than one-third of workers in frontline industries (e.g., Trucking and Building Cleaning Services) also live in low-income or socio-economically disadvantaged families.
Think back to Trey — even with the “new” higher wages of ~$15/hour, Trey felt he couldn’t contribute to retirement savings, thus foregoing the match offered by his employer. Because frontline and younger workers are still finding a financial footing and focused on more immediate goals like paying for a security deposit or a car, they inadvertently get penalized twice — paying more in taxes and losing out on the employer match.
In short, these employees need flexibility in their savings behavior to achieve the stability and confidence to contribute to a 401(k) regularly.
3. Frontline employees must often dip into retirement savings.
All that said, the number of people participating in retirement savings does keep going up — a trend in part thanks to easing and growing tax benefits. But to balance the costs of things like emergencies and debt payments, many employees with lower incomes are dipping into their 401(k) savings to access the money they need at the moment.
And with varying levels of penalties and fees, the progress they might have made toward retirement goals is muted with each withdrawal.
Nearly one in four (23%) prematurely dipped into their retirement savings or stopped contributing altogether during COVID. Even if contributions are started again, the cycle will likely continue the next time cash is required to cover expenses.
Based on conversations we’ve had with organizations at Sunny Day Fund, about 20-30% of participants have 401(k) hardship loans or withdrawals, particularly for lower-income and minority populations.
One example is Emily, a worker in a regional clothing manufacturing warehouse. Emily needed $1,500 for a family medical emergency. Without enough liquid cash, Emily withdrew the $1,500 from her 401(k), wiping out almost half of her overall retirement savings. And after penalties, fees, and taxes, she ended up with only $1,000.
Emily’s situation is, unfortunately, typical for frontline workers. Although 401(k)s are accessible to frontline employees, the need for immediate cash is often too great to make sustainable savings progress.
This is where a complement to the 401(k) comes in. An emergency savings balance has proven to limit the need for households to dip into retirement savings. According to an Aspen Institute study, “households with at least $1,000 in emergency savings were half as likely to withdraw from their workplace retirement savings account.” People with at least $5,000 in savings were nearly four times less likely to withdraw from their retirement accounts.
People like Trey and Emily are best equipped when they can save for both immediate needs and financial goals.
Invest in workplace emergency savings; improve retention
A 401(k) has an important place in the employee retention world. However, your employee retention strategies must encompass both your employees’ current AND future financial situations — a role that a 401(k) isn’t designed to fill on its own.
In addition to a 401(k), we also recommend offering a workplace savings plan as a benefit for your frontline employees. This program allows employees to
- automate their saving contributions,
- prepare for emergencies and other immediate financial goals,
- earn quarterly rewards from employers, and
- access fast, penalty-free, and unrestricted withdrawals.
Combined with a 401(k), this type of program helps employees build a solid financial foundation in the short term, allowing them to then contribute to retirement over the long term. Armed with both benefits, employee loyalty will be increased, and you’ll be more likely to retain their talent.
At Sunny Day Fund, we excel at workplace savings — we offer a customizable employer-rewarded savings program. This program serves as both an employee attraction and retention strategy. Reach out to us at firstname.lastname@example.org and ask about our workplace emergency savings plans.