Emergency savings remain one the strongest predictors of financial well-being. However, many Americans face challenges in actively building an emergency fund or saving at all.
The resulting poor financial well-being also impacts mental and physical health. In the recently released Financial Health Pulse 2023 U.S. Trends Report, 40% of those who reported fair or poor mental health were also financially vulnerable individuals.
For companies committed to a thriving workforce, bridging these gaps by offering easily accessible financial resilience solutions is no longer a nice to have, but a must-have. And emergency savings tops the list of those solutions for most American workers.
BlackRock’s recent Emergency Savings Initiative (ESI) Report, which stems from a four-year collaboration with nonprofits, employers, and providers, champions the importance of workplace emergency savings. The report shows emergency savings initiatives have helped over 10 million American workers save over $2 billion in liquid savings. Beyond catalyzing these efforts, the report offers insights through case studies, highlights best practices for plan design, and recommends effective strategies for benefits communication.
In this blog, we elevate three takeaways from the report:
- Emergency savings enables retirement savings
- Incentives and behavioral science enhance savings outcomes
- Automated savings is the future for all workers
Takeaway 1: Emergency savings enables retirement savings
While some speculated that emergency savings might take away from retirement savings contributions, the BlackRock report tells a different story. The research found that access to workplace emergency savings boosts retirement participation and contribution rates and decreases 401(k) loans and withdrawals.
Emergency savings may increase retirement savings participation
ESI conducted research in collaboration with Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center (RRC) and Commonwealth to study the relationship between emergency savings and retirement savings. The study concluded a positive correlation between emergency savings and retirement account contributions. Specifically, “those with emergency savings are 70% more likely to contribute to their retirement plan.”
The BlackRock report also cited a survey led by SaverLife and Commonwealth, which would go on to influence one of the earlier variations of the present-day emergency savings provisions Secure Act 2.0. The study focused on access, especially among low and moderate income workers. The big takeaway was that “nearly a third of individuals would be more likely to start contributing or contribute more to a retirement account if it was paired with an emergency savings option.”
That hypothesis held true in a study with Voya and UPS, where the researcher Commonwealth uncovered a comparable effect with after-tax emergency savings participants and their retirement savings contributions. It’s also been echoed in a recent emergency savings rollout at Delta.
Emergency savings reduce hardship withdrawals
Beyond acting as a gateway, emergency savings can also be a deterrent to retirement savings loans and withdrawals. The earlier mentioned DCIIA RRC and Commonwealth study also found that having at least $1,000 in emergency savings cuts the likelihood of 401(k) withdrawals in half.
Voya’s research as a part of the same initiative also saw that “participants with insufficient emergency savings were 13 times more likely to take a hardship withdrawal than those with adequate savings.”
In short, workers’ immediate financial stability and resilience are critical to their long-term financial freedom.
Takeaway 2: Incentives and behavioral science enhance savings outcomes
BlackRock’s ESI report also compiled findings on techniques that could drive awareness, participation, and usage of emergency savings. Critical to this multifaceted approach are monetary incentives and behavioral science principles.
How Incentives Increase Emergency Savings Enrollment
A prize-linked savings program distributes monetary awards at certain intervals based on behavior-based eligibility. For example, did the employee contribute this month? Across rollouts at Truist, Levi, and Best Buy, the approach yielded more consistent and higher savings contributions.
Continued rewards apply to any individual and are not treated as a lottery, they’re general rules to a longer savings journey typically driven by balances or milestones. We deploy a version of this at Sunny Day Fund ourselves. Here as well, programs saw success.
How Behavioral Science Powers Better Savings Outcomes
In the background of all program setups was the power of behavioral science. Approaches such as active choice and mental accounting created new pathways for engagement beyond traditional education and communication. For example, simple changes in onboarding led to 39% higher uptake and nudges within email drove 9% higher engagement.
Takeaway 3: Automate emergency savings for all workers
One of the biggest takeaways of the report is that emergency savings is widely accepted (and desired) by workers, but the challenge really remains logistical. When programs were structured to simulate “opt-out” rather than “opt-in,” the programs documented by ESI saw 4x higher uptake.
As such, one way to rise above that challenge is to enable automatic enrollment into emergency savings.
With Secure Act 2.0 enabling auto-enrollment into pension-linked emergency savings accounts (PLESAs), the door has already been opened. However, this approach still leaves behind tens of millions of American workers without access to retirement products today. Many also prefer the simplicity and portability of an out-of-plan product.
Businesses would likely be onboard with legislation that clarifies and enables auto-enrollment for emergency savings. After all, supporting the financial health of all employees in your workforce isn’t just best practice; it serves as a competitive edge in attracting and retaining talent.
Bonus: Inclusive product design can enable even better savings outcomes
Discover how to build more inclusive and effective financial products that truly work for everyone from our panel discussion with Fintech Sandbox and Commonwealth. This session delves into the pillars of trust, the role of community networks, the importance of multilingual capabilities, and offers a deep dive into the world of inclusive product design and user behaviors.