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Emergency Savings Accounts Funded by Payroll Deductions Boost Financial Wellness

Emergency savings reduce withdrawals from retirement accounts, advocates say

September 14, 2020 | Lin Grensing-Pophal

A woman looking at her phone while sitting at a table.

updated October 22, 2020

Financial stress hurts workers' ability to stay motivated and do their jobs, and for many employees, the COVID-19 pandemic has only added to that stress. Some employers are taking steps to ease employees' financial burdens by setting up emergency savings accounts (ESAs) that allow automatic deposits through payroll deductions—much like how employees fund their 401(k) accounts.

ESAs and How They Work

Whether you call them emergency savings accounts, emergency fund accounts, rainy-day accounts or even sidecar accounts, this saving option is being recognized by employers as an effective way to help employees put away money that they can later access in an emergency—like the COVID-19 crisis. And while there are differences between some of these terms, Dave Amendola, a consultant at Willis Towers Watson who has been helping clients evaluate ESAs, said the central concept is "to help employees save directly for an emergency event or to develop savings funds to handle financial emergencies, as opposed to saving for retirement."

Most employees are already familiar with how 401(k) contributions work, and ESAs are funded similarly. The difference with ESAs, however, is that the dollars deducted from employees' paychecks are taxed as income, do not have to remain deposited long term, and so are available to employees who have immediate financial needs.

New Products Launched

New ESA products are now becoming available, such as one introduced by Businessolver, a benefits administration technology company. These programs allow employees to have funds deducted from their paychecks, after taxes are paid, in amounts of their choosing and to access those funds at any time without penalty through either a debit card or an electronic transfer. Employers can offer the accounts as part of their benefits enrollment process.

The accounts "are an avenue for employers to encourage healthy saving habits for their employees in tandem with other consumer accounts and benefit offerings," said Rae Shanahan, Businessolver's chief strategy officer.

Phil Mason, chief operating officer and director of UMB Healthcare Services in Overland Park, Kan., said that "adding this vehicle to existing items like health savings accounts and 401(k)s is one more way employers can help support employees in achieving their overall savings goals."

Pandemic Heightens Interest

"There are a lot of employees who are not saving for, or are not prepared to handle, a financial emergency," Amendola said. The issue has come to light especially during the pandemic, as employees across the U.S. have been furloughed or have had their wages reduced or hours cut in the wake of the shutdowns and economic crisis brought about by the COVID-19 outbreak.

Jonathan Price, senior vice president and corporate retirement practice leader with Segal, an employee benefits consulting firm, explained that "having an employer-facilitated 'back-pocket emergency fund' helps employees avoid high-interest payday loans or prevents them from dipping into long-term savings," especially since the Coronavirus Aid, Relief, and Economic Security (CARES) Act has made retirement plan withdrawals easier.

Amendola said financial resilience "is helping employees address difficult life events that may come up, and likely will come up, during their working careers. Employers have started to focus on these emergency savings accounts as one of the levers they can use to help employees become more financially resilient." The pandemic, he added, "brought that into very clear focus."

SHRM Resource Spotlight
Coronavirus and COVID-19

Emergency vs. Retirement Savings

ESAs may keep workers from accessing their retirement funds early, ensuring that their retirement dollars are available when they reach retirement age.

In a November 2019 white paper, Building Emergency Savings Through Employer-Sponsored Rainy-Day Savings Accounts, researchers at Harvard, Yale and Brigham Young universities; the Wharton School at the University of Pennsylvania; AARP; and the National Bureaus of Economic Research concluded that "having separate rainy-day and retirement savings accounts can facilitate greater saving for short- and long-term purposes by helping to psychologically segregate and catalyze these two motives to save." Offering both ESAs and 401(k) plans, for instance, can "reduce the frequency with which short-term needs crowd out long-run retirement savings."

On the other hand, some express concern that ESAs might discourage or lessen employees' saving in traditional retirement accounts.

Still, Price at Segal said, employers offering ESAs can send a strong message to workers about their concern for employees' financial well-being. "By offering an auto-deposit arrangement, an employer helps employees utilize the power of inertia to their benefit," he said. "Literally, by taking no future action, the employee improves their personal financial security."

401(k) 'Sidecar Accounts' Are Another Approach

So-called sidecar accounts, which Prudential began offering in 2018 and which are now available from other 401(k) services firms, are adjuncts to retirement savings plans. By sharing a common platform with a 401(k) plan, once the after-tax cash builds up to an employee’s comfort level in the sidecar savings account, future payroll deductions can be directed into the employee's retirement savings using pretax dollars.

A potential drawback may be that in some cases participants may not be able to withdraw funds immediately. Although the delay may be slight—just a few days—that could represent a downside to some.

Look Before Leaping

Unlike regular savings accounts set up at banks or thrift unions, with ESAs, there are "issues involved with making contributions and how they get withdrawn, and nuances that can potentially be challenging to communicate to employees," Amendola said.

He advised plan sponsors to consider the following:

Whether they want to set up the ESA to work through auto-enrollment (see "A Green Light for Autosave Programs," below).

Whether employer contributions will be included after the account reaches a certain threshold.

Whether contributions may spill over into other types of contributions or investment vehicles after accounts reach a certain savings level.

What the impact of these accounts might be on existing retirement plan accounts.

"Plan sponsors should at least be willing to take a step back and try to understand the different options they may have and how those options might fit … in their benefits packages and their financial well-being strategies," Amendola said.

A Green Light for Autosave Programs

Regulatory uncertainty regarding whether employers were authorized to set up employee savings accounts funded through payroll deductions—and, specifically, to automatically enroll employees into the program—was addressed in July when the federal Consumer Financial Protection Bureau (CFPB) issued guidance in a Compliance Assistance Statement of Terms (CAST) template.

Employers interested in creating an automatic savings (autosave) program to help employees build emergency savings can use the CAST template as the basis for an application to receive the CFPB's approval to create such a program. The guidance was issued in response to a request by Commonwealth, a nonprofit that works to promote savings and wealth accumulation for low- and moderate-income earners, in collaboration with financial services firm BlackRock's Emergency Savings Initiative.

The CFPB's guidance "clarifies a long-standing federal rule, Regulation E, that acted as a barrier to employers' implementing automatic enrollment in emergency savings programs for their workers," said Jason Ewas, senior policy manager at Commonwealth. The guidance "makes it easier for employers to apply for approval from the CFPB to add an autosave program to their employee benefits."

Under an autosave program, Ewas explained, new and existing employees will be able to direct a portion of their earnings to an account at a financial institution of their choice. "If an employee does not designate an account after receiving notice and after a reasonable period of time, the employer would create an autosave account for the employee at an institution designated by the employer," he noted.

"While employees have been able to split their deposit into checking and savings in the past, this is the first time that the door is open for employers to auto-enroll employees into savings, similar to the way they do a 401(k), with the employee having to opt out instead of opt in," he said. "We know from research that the more automatic the process of saving is, the more likely people are to save, from emergency savings to retirement."

Update:
UPS Launches Emergency Savings Account for 90,000 Employees

On Oct. 22, global shipping and logistics provider UPS announced the launch of an emergency savings account program for its 90,000 US-based nonunion employees. The initiative provides them with a way to set aside liquid after-tax savings easily and automatically, in tandem with their 401(k) retirement plan administered by Voya Financial.

UPS, which joined BlackRock's Emergency Savings Initiative in 2019, collaborated with national nonprofit Commonwealth to design and implement the program. Commonwealth data indicates that plan participants who are saving during the pandemic are half as likely to dip into retirement for emergencies.

Eligible UPS employees will be able to automatically contribute emergency savings directly to the after-tax account, which is on a shared platform with their 401(k) plan with Voya Financial. The after-tax account is a separate sidecar account that is not subject to 401(k) restrictions on withdrawals.

"At UPS, we are committed to helping our employees save," said B.J. Dorfman, director of global retirement strategy. "We value our workers and understand that their financial security is an important element of their success in the workplace and our success as a company."

Lin Grensing-Pophal is a freelance writer in Chippewa Falls, Wis.

Related SHRM Articles:

Employers Feel More Responsible for Employees' Financial Wellness, SHRM Online, October 2020

How Income-Advance Loans Help Financially Stressed Employees, SHRM Online, February 2020

Helping Employees Save for the Unexpected Pays Off, SHRM Online, August 2019

6 Ways to Measure the Success of Financial Wellness Efforts, SHRM Online, January 2019

'Rainy Day' Savings Accounts Prevent 401(k) Raids but Face Regulatory Hurdles, SHRM Online, November 2017