Emergency sidecar savings vehicles added on to workplace retirement programs can be a potentially valuable tool to help Americans weather financial storms, according to a new report.
When emergency savings were available, households prioritized using it over dipping into retirement savings, and thus, such savings appeared to protect against retirement withdrawals, Morningstar’s Stan Treger and Steve Wendel explain in “The COVID-19 Pandemic, Retirement Savings, and the Financial Security of American Households.”
In fact, the study found that having emergency savings was a strong predictor of financial resilience. The amount of savings that a household had before the pandemic strongly predicted the household’s ability to manage its debt and pay its bills on time during the pandemic, even after controlling for income, age and partnership status of the household.
Retirement savings, however, did not provide near-term financial stability in the same way—nor were they set up to be that way. Among households with workplace retirement accounts, the level of retirement savings had no discernable effect on the ability to manage debt or pay bills on time during the pandemic, the report notes.
That said, loosened retirement withdrawal rules roughly doubled the probability of withdrawal where the new CARES Act rules were known and applied, according to the research. Most households did not tap into their retirement savings with loans or other withdrawals. However, citing data from the ICI, the report notes that the number of people who did increased to an estimated 12.6% in 2020, from 6.8% in 2019, primarily because of participants using coronavirus-related distributions enabled by the CARES Act.
Financial Gaps
The researchers also found that the pandemic put preexisting gaps in the financial health of American households on display, especially by income and race. The majority of lower income and non-white households lack sufficient emergency savings.
African American households showed low emergency and retirement savings both before and during the pandemic. Hispanic Americans were especially likely to report they were worse off because of the pandemic—a finding primarily driven by overrepresentation among low-income households.
Additionally, medical debt and student loans were found to be more common and clearer signs of financial stress than often-talked-about payday loans. Medical debt appears to be the primary type of debt occurring alongside retirement savings withdrawals, while student loan debt is also linked to poorer financial outcomes, although to a lesser extent, the report notes.
One unexpected bright spot was a major decrease in “unbanked” Black households. Historically, a much larger proportion of Black households are unbanked (without a checking or savings account) than are Hispanic and white households, but that gap shrank considerably, according to the analysis. The researchers found that, between 2019 and 2020, Black households that possessed neither a checking nor a savings account dropped to 12% in 2020 from 18% in 2019. Black households without a workplace retirement savings account also dropped to 48% in 2020 from 61% in 2019.
In addition to emergency sidecar savings accounts, the report suggests that targeted benefits and products to help individuals with student and medical debt, in particular, may have spillover effects on overall employee financial health and the ability to save for the future.
“These findings need to be followed up by further research using administrative data from banks and recordkeepers, in addition to the self-reported data from this survey, but they are very promising,” the report notes.
The Aspen Institute’s Financial Security Program, NORC at the University of Chicago, and the Defined Contribution Institutional Investment Association Retirement Research Center, also assisted Morningstar in the joint research project, which compared the pre-pandemic financial situations to the current financial situations of the very same nationally representative sample of American households.
