Automated emergency savings plans, a new kind of benefit that provides an additional way for employees to save for future expenses, may offer benefits beyond achieving that goal – including reducing plan leakage.
These savings funds differ from tax-qualified retirement accounts in that they are composed of after-tax funds. But like a pre-tax retirement fund, money can be deducted from paychecks and put into automated emergency savings funds automatically. Says Mike Webb of Cammack Retirement, “The beauty of such programs is that there is no conscious employee decision to ‘set aside’ funds; instead, technology is used determine savings amounts.”
In addition, Webb points out, there are services an employee can use that examine spending patterns by linking the emergency account to an employee’s bank accounts, and then will automatically deduct from those accounts based on those patterns. That way, he notes, an employee will only save when he or she can afford to. He adds that there are other types of savings-friendly technology, such as ones that can total up all of one’s purchases and save that amount.
Could such accounts can help reduce leakage from retirement plans from hardship distributions and loans taken against retirement accounts? “Yes, I believe that it would reduce plan leakage, since there would be another source for the funds,” says Webb. “Emergency savings accounts, which providers also label as ‘rainy day fund’ accounts, should, in theory, give these participants an alternate method to a retirement plan for small-dollar cash needs.”
But at this point, these kinds of accounts are “too new for there to be any substantive studies” that provide hard data on that kind of effect from such emergency savings accounts, says Webb. However, he notes that a recent study by the Employee Benefit Research Institute (EBRI) found that while only one in five families have liquid savings of more than three months of their family income, half of American workers report having a rainy-day fund that could cover three months of expenses. “It is not a big leap from that assertion to claim that increased emergency fund savings would also mean that it would be less likely for participants to access the funds in their DC plans, if only due to the fact that they have emergency funds as an alternative,” he argues.
In a recent blog post, Webb argued that there are additional advantages to such emergency funds, such as their putting individuals in a better financial position to save in a retirement plan and the likelihood that the automation of the process makes it “more likely” that participants would take part in both, since they would be acclimated to such a process.
Of course, automated emergency savings funds are not yet widespread. Webb says that while he has not seen any statistics, he suspects that “usage is low, probably in the under 10% range we see for student loan assistance.” Still, he cites a report by CBS News suggesting that it may be growing and reports that more big companies are offering such a benefit. Such reports, he says, “indicate that the benefit is trending upward.”