When I wrote about employer-provided emergency savings accounts 4 years ago, the concept was still new. Some corporations were experimenting with tactics to help their staff save for their short-term needs, but many people didn’t even think about the concept. Employers.
What a difference the pandemic has made. Millions of people were laid off without warning, and few had cash reserves for even a few months of unemployment. Big employers and lawmakers have taken note, says Claire Chamberlain, global head of social impact at investment manager BlackRock. As a result, thousands of workers now have the ability to generate emergency savings through their employers, and Congress has passed legislation to inspire more businesses to incorporate short-term savings options.
“I think a lot of other people woke up,” Chamberlain says.
THE PANDEMIC HAS ILLUSTRATED THE FINANCIAL FRAGILITY OF AMERICANS
Employers tend to overestimate the monetary stability of their workers, says Timothy Flacke, co-founder and executive director of Commonwealth, a nonprofit that promotes monetary security. The pandemic has led households to realize that most Americans live paycheck to paycheck, and many of them have little to no emergency savings.
“COVID-19 has replaced a lot of things in terms of employers’ understanding of their employees’ day-to-day monetary challenges,” Flacke says.
But there’s also a growing awareness that emergency savings are critical to monetary health, he says. Even a small amount of savings can help families avoid falling into expenses or resorting to expensive loans. Workers who don’t have emergency savings are less likely to make a contribution to retirement plans, and those who do have savings are less likely to tap into the retirement savings they have, Flacke says.
In addition, corporations are aware that monetary strain hurts painters’ productivity by distracting them by working hours, Chamberlain says.
“It’s this obstacle to productivity that is the main motivation for employers,” says Chamberlain.
THE BOOST TO EMERGENCY SAVINGS requires steam
In 2019, BlackRock announced its emergency savings initiative in partnership with Commonwealth, Financial Health Network, and a third nonprofit, Common Cents Lab. The initiative began with a handful of employers and monetary corporations experimenting with emergency savings programs.
Since the start of the pandemic, those corporations have been joined by several giant employers, including UPS, Starbucks, Delta Air Lines, and Best Buy. Some will offer incentives to inspire savings: Delta will donate up to $1,000 to employees who complete a money education program, for example, while Starbucks will give a contribution of up to $250.
One of the biggest successes so far is a savings feature added through payroll processor ADP to your prepaid debit card and the Wisely app. Wisely can be used through employers to pay staff as an option for checks or direct deposit. The savings feature allows users to set up automatic movements to a “savings envelope” and move savings back to their available balance when they want to spend money. By the end of 2022, Wisely users had stored more than $1. 55 billion, according to Chamberlain.
DON’T WAIT FOR AN EMERGENCY SAVINGS PLAN DURING OPEN ENROLLMENT
We’re a far cry from the fact that employer-provided emergency savings accounts aren’t as unusual as employer-provided health insurance or retirement plans, but it turns out the momentum is taking shape.
“It’s rare that you have a verbal exchange with an organization of any size that’s thinking about emergency savings,” says Matt Bahl, vice president of the Financial Health Network and guilty of monetary fitness at work.
It doesn’t hurt that SECURE 2. 0, the pension law that went into effect last year, includes provisions encouraging employers to offer emergency savings options.
Starting in 2024, employers will be able to add an after-tax emergency savings option to their retirement plans, allowing employees to set aside up to $2,500, an option known as a 401(k) sidecar. Auto-enrollment to increase participation. Another provision allows businesses to allow their staff to make penalty-free withdrawals of up to $1,000 from their 401(k) accounts and other office retirement accounts.
But employers are more likely to offer emergency savings schemes in addition to their retirement plans than as part of their retirement plans, Bahl says. Self-sustaining savings plans can also be less difficult and less expensive to implement, and may also appeal to some of the most financially fragile employees who may not feel able to contribute to their retirement, Bahl says.
“We work with some of the largest employers in the country. None of them offer a parallel program, but most of them have or are contemplating implementing an emergency savings option in addition to a retirement plan,” Bahl says.
Still, Congress’s blessing on the concept of employer-provided emergency savings plans is a watershed moment, Bahl and Flacke agree.
“The fact that policymakers who couldn’t agree on much on those days are passing a bill that includes those provisions is a pretty transparent signal,” Flacke said.
In the past, staff would likely have been reluctant to apply for emergency savings options, fearing stigma for their money hardships, Flacke adds. A greater awareness of the fact that most staff live paycheck to paycheck can also alleviate this fear.
“I think there’s more room for other people to say, ‘This is my reality. ‘And it would help if they could set up systems that would allow me to have a buffer,” Flacke says.
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This column was provided to The Associated Press via the non-public finance site NerdWallet. The content is intended for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist for NerdWallet, a qualified money planner, and a “Your Credit Score. ” Email: lweston@nerdwallet. com. Twitter: @lizweston.
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