Though many American workers want to save, they’re finding it hard to follow through and it’s impacting their financial well-being. Employers want to help because they understand how financial stress is impacting their business outcomes and how emergency savings can help. Employers and employees alike are looking for innovative solutions that meet long-term goals like retirement security and more immediate financial objectives like an emergency fund.
In our recent webinar, we explored how behavioral science can equip individuals with better savings habits and thus drive better financial well-being. This article presents key insights into specifically workplace emergency savings, the interplay between behavioral science and those savings activities and outcomes, and strategies to overcome hurdles.
The panelists included Leigh Phillips, President and CEO of SaverLife; Brian Gilmore, Vice President of Commonwealth; Adam Zuckerberg, Vice President Worksite Solutions of Western & Southern Financial Group; Les Williams, Director of Partnerships of Sunny Day Fund, and Sid Pailla, CEO and Founder of Sunny Day Fund.
Here’s an overview of what we’ll cover, much of which was highlighted in the webinar:
- Why is it so difficult to save today
- How behavioral science empowers savings habits
- Measuring the Success of Savings Programs
Why it’s important to have an emergency savings program as an employee benefit
Financial security goes beyond just income; it also means being prepared for life’s unpredictable expenses. This is key in helping people avoid turning to high-cost debt solutions, like payday loans, credit card debt, or withdrawing from their 401(k). By having a dedicated emergency savings fund, people can reduce stress, avoid taking money out of retirement savings early, and keep their finances stable.
A workplace emergency savings program in particular enables automation and incentivization that would otherwise make saving difficult, inaccessible, or not worthwhile. By simplifying the savings process, organizations can significantly enhance the financial health of their employees. This is particularly beneficial for employees who live paycheck to paycheck, which can include employees earning six-figure incomes.
What is behavioral science and how it connects to financial well-being
Behavioral science digs into how people act and make decisions. When applied to savings, Heidi Johnson, Senior Director, Behavioral Economics from the Financial Health Network, explains, it “helps us understand how people make financial decisions. It provides insights into savings features and communications around savings that motivate people.”
By understanding how people think and make choices, employers and benefits providers can design benefits plans that equip individuals with the necessary tools to save. It’s all about turning understanding into action.
Why is it so difficult to save today
Saving today is challenging due to several factors such as insufficient and inconsistent income, rising cost of living, unsuitable financial products, overburdened individuals, psychological barriers, and lack of trust in financial institutions.
The impact of insufficient and inconsistent income on savings
Irregular income, particularly common among gig workers, low-wage earners, hourly workers, and self-employed individuals, can pose a significant challenge to consistent saving. Policymakers and states are considering solutions. For instance, Colorado is considering implementing laws to guarantee a minimum number of work hours for workers, stabilizing income and making it easier to track finances.
Hourly workers often lack fixed work schedules, which makes it hard to connect with them about saving. Leigh Phillips says, “It’s really hard to reach those workers even if they do have a stable employer.” That’s why it’s important to find creative ways to get these workers interested in saving.
Inflation shifts incentives
Escalating living costs and inflation significantly impede the ability to save. This is particularly challenging for those with inconsistent incomes, as they risk falling into a debt cycle due to spending more on essential needs compared to high-income earners.
Stagnant wages, alongside an expanding gap between expenses and income, further complicate financial stability for Americans. Sid Pailla explains that spending during inflation rather than saving money may actually be seen as rational because money is losing value quicker over time. He points out, “The national average savings interest rate is 0.4% according to the FDIC, but inflation is over 10 times that.” In essence, the money loses 3.6% in real value after a year if saved.
Unfortunately, elements of inflation may stick around longer too. Adam Zuckerberg adds, “The rate of growth of inflation may be dropping a little bit but prices are still going up. Just that rate of growth is what’s changing.”
Inflation can also force especially lower-income employees to become more selective about their employee benefits. For example, a recent survey from Allianz Life found more than half of working Americans adjusted down their retirement contributions. This shift intensifies wealth inequality as especially lower-income people must prioritize immediate needs over future savings.
Lack of financial products designed to meet the needs of low and moderate income workers
Current financial systems and products, like checking accounts, credit, and savings accounts, are designed for people who earn more than they spend routinely. However, we know that may not be case for hourly, seasonal, or gig workers – and so the underlying financial products may actually be unintentionally dismissive of these populations. Phillips recommends that we “center users and individuals and really design for them as opposed to trying to change people to fit into existing products.”
Another reason people may not contribute to savings is because of the amount of friction to getting started. As Gilmore puts it, “There’s many steps and decisions that need to happen to get on that savings habit. And the more steps you put between someone wanting to save, and them actually being able to save, especially in the context of volatile income,” the harder it is to save. Challenges like not knowing how much to save regularly, aligning automated savings with irregular income, and dealing with decision overload on workplace benefits platforms further complicate the savings process.
Finally, the user experience of traditional financial products leaves much to be desired. “The experience that someone has trying to save, it doesn’t feel as good as spending,” highlights Gilmore. Savings can be re-designed to feel easier and more rewarding.
Workers overburdened with tasks beyond just work
As the economic landscape changes, responsibilities are increasingly shifting from employers to employees. “Finances become more complicated for people who are working in the economy,” Phillips points out. Self-employed workers must manage their income, taxes, and other financial aspects that are not automatically sorted from their earnings. The lack of access to benefits compounds these financial intricacies.
Take for example the report by SaverLife on micro-entrepreneurs where “82% are using their own personal money to finance their micro-entrepreneurship.” Many people earning income from self-employment tend to mix personal and business expenses and income, often with no distinct separation. On top of that, many gig workers don’t see themselves as self-employed, which can lead to missed deductions and future penalties. Individuals are juggling many responsibilities beyond their work and family, all while trying to navigate a complicated mix of regulations and tools. It is important to acknowledge and address these added complexities to better support such workers.
Lack of trust in financial institutions
Trust in financial institutions, or rather the lack of it, can also deter individuals from saving. A recent poll found only 10% trusted financial institutions a great deal. Employers have a golden opportunity here. In an Edelman Trust Report, employers were found to be the most trusted party, even accounting for partisan divides. Leveraging this trust factor, employers can deliver workplace emergency savings programs to automate their employees’ intent to save.
Understanding the Psychological Challenges in Saving
Saving can be a challenging journey, often accompanied by stress and feelings of inadequacy. Gilmore says that saving can demand us to prioritize the future over the present. He remarks, “Just as people, we really are not great at prioritizing the future over the present.” Whether that lack of future orientation comes from prior trauma, lack of guidance, cultural factors, or shared human psychology, the outcome remains the same.
Moreover, conversations about savings are often driven by fear, which can lead to feelings of shame, which both Phillips and Pailla affirm with SaverLife’s and Sunny Day Fund’s user stories. To change this narrative, it is important to overcome inaction bias and fear of uncertainty. The insights from behavioral science can help us understand these psychological hurdles and formulate strategies to overcome them.
How behavioral science empowers savings habits
Behavioral science is instrumental in empowering individuals to form better savings habits. It provides a range of strategies, such as leveraging choice architecture, mental accounting, appropriate types of friction, aligned incentives, and socio-emotional messaging.
Choice architecture can guide decision-making and help establish savings habits, especially in the normal flow of employees’ required decision-making. One such approach is the “active choice” method, highlighted by Gilmore at Commonwealth. This approach requires employees to answer ‘yes’ or ‘no’ when asked to join a workplace emergency savings program. As Gilmore puts it, “This could be part of a mandatory process like benefits selection at onboarding or open enrollment. By using active choice, you are ensuring you are getting employees’ attention, which can be challenging in a crowded workplace benefits environment.”
Johnson also supports the idea, noting that the “Financial Health Network has also found that using techniques like ‘active choice’ encourages people to take action towards their savings goals. We partnered with a fintech to implement this technique and found that it boosted enrollment in automatic savings from payroll deductions by 31% for workers who saw this prompt during onboarding to the app.”
Mental accounting – or helping employees think about savings in different buckets, goals, envelopes, jars, or any other such term – can create an additional emotional incentive. This technique, popularized by Richard Thaler, can significantly motivate individuals to save larger amounts and adhere to their savings goals.
For example, if an employee was saving for an emergency, they may decide to put away only $30 per paycheck. However, if the employee can also save for a goal like moving into a new apartment, they may put away an additional $50, for a total of $80. In the worst case, the total amount will remain available for emergencies.
Leveraging Friction Appropriately
As mentioned earlier, any friction to an employee’s decision and action to contribute to saving can reduce follow through – so it must be reduced. One way to do so is through automation. As Zuckerberg noted, automatic enrollment worked wonders for the 401(k) when it was introduced, but that’s currently only feasible for in-plan workplace emergency savings programs through the SECURE Act 2.0.
Though out-of-plan workplace emergency savings programs have the added friction of requiring voluntary enrollment, their wider impact and simpler product more than make up for it. In both cases, it’s also possible to design in auto-escalations, slowly increasing how much an employee choose to save, into the employee’s onboarding experience. Both auto-enrollment and auto-escalation were first popularized for the 401(k) space by Thaler and Shlomo Benartzi’s Save More Tomorrow program.
But not all friction is bad – consider what happens when an employee decides to spend out of their emergency savings. Just like with retirement savings, there may be leakage or there may be spending for non-emergencies. Here, some intentional friction – like verbalization or loss aversion, defined below – could be a good thing to make the employee think twice before spending down their emergency savings.
Verbalization encourages individuals to voice their savings goals and spending intentions, typically via a self-written memo. This active engagement helps to reinforce the reason to save. Loss aversion highlights potential losses that could occur if individuals do not save, which taps into the innate desire to avoid negative consequences. For example, highlighting that the employee may lose $50 in incentives from their employer if they withdraw today can give pause. By combining these techniques, employers and emergency savings benefit providers can create a more effective approach to encouraging and sustaining consistent savings habits.
Gamification and Incentives
By incorporating strategies like instant gamification and incentives, employees can become extra motived to take action in an engaging and enjoyable way.
Gamification adds an element of interaction to the savings process and is often built around achieving certain savings goals or saving consistently. For example, SaverLife and Commonwealth collaborated to launch prize-linked savings, which leveraged small dollar rewards to create collective action towards saving more. SaverLife’s “Scratch & Save” competition, reminiscent of a lottery scratch ticket, provides members with a weekly opportunity to win a $5 cash prize if they save money or take steps towards improving their financial health. These initiatives not only incentivize regular savings but also infuse a sense of thrill into the process, despite the possibility of winning being relatively low. As Johnson puts it, “people get excited about having a chance to win a prize.”
More broadly, economic incentives can come in the form of sign-up bonuses, milestone rewards, or a scaling reward model. Commonwealth documented a few such approaches in their recent research on incentives to drive engagement with workplace emergency savings.
While approaches and results vary, Sunny Day Fund has found most success with a small sign-up bonus of $25 to $50, and an additional $200 to $300 in cash rewards paid out periodically over the course of a year based on consistent net savings activity. For an out-of-plan program, not all employers need to have the same reward approach.
Gilmore emphasizes the impact employers have in shaping employees’ savings habits. He notes, “The idea of the employer putting more money in people’s pockets…we already do that in the retirement sector, why not apply that to the emergency saving side of thing? And that goes a long way to make savings feel positive rewarding rather than self-sacrifice and delayed gratification that comes with a future-focused approach.”
Communication is a core part of shifting behavior. Specifically, socio-emotional messaging seeks to connect with individuals on a personal level, appealing to their aspirations and highlighting the benefits of saving. Tailoring messaging based on personality types and employing grassroots efforts to build a sense of community and champion saving can significantly influence behavior. “The more you can tap into to what people can achieve and build on those wins then you see greater success,” said Phillips. Marketing and communication initiatives that frame savings as a positive and celebratory achievement can further reinforce the significance of saving.
Additionally, recognizing savings milestones can offer intangible incentives. Celebrating these achievements, including withdrawals, can help individuals feel valued and appreciated, which in turn can fuel their motivation to continue their savings journey and boost their financial confidence. By coupling tangible rewards with positive reinforcement, these strategies make the path towards financial wellness more engaging and rewarding.
Measuring the Success of Savings Programs
Changing behavior to create better savings outcomes for employees is just the start. It’s also important to measure and iterate on the impact, beyond simply understanding how many employees are saving and how much they’re contributing per paycheck.
We can also consider the frequency with which individuals meet their savings targets and the use cases from withdrawals to better understand the success of a workplace emergency savings program. Other key indicators include the impact on 401(k) or hardship withdrawals, safety incident reductions, standard CSAT or NPS scores, and of course employee retention versus benchmarks.
Successful savings programs not only enhance short-term financial confidence and resilience against unexpected expenses but also boost long-term financial health and wealth-building opportunities, including retirement security and home ownership. However, the journey towards financial well-being and regular savings isn’t always linear. Progress can differ for each individual and may not always show a steady increase. The focus should be on the consistency of savings and the overall net gains over time, meaning the establishment of a regular habit of saving and gradual progress towards financial goals.
After all, financial well-being isn’t just about numbers. It also encompasses improving one’s overall quality of life and feeling financially secure. It means having the financial freedom to chase dreams, plan for the future, and experience peace of mind regarding finances.
You can watch the full webinar here.