In the workplace, financial insecurity has been correlated with decreased productivity, increased turnover and absenteeism, and increased likelihood of workplace accidents. Financial insecurity, specifically lack of emergency savings, is a pervasive problem in the United States, which has only become more evident during the COVID-19 pandemic. This widespread financial insecurity leads to losses not only for individuals and their families and communities, but also for their employers and ultimately the economy as a whole.
The following summarizes Commonwealth and NMG Consulting’s research on retirement plan advisors (RPAs) and highlights a significant opportunity for RPAs to join with recordkeepers and plan sponsors in playing a key role in helping Americans build emergency savings.
In response to both growing evidence around the business costs of financial insecurity and the severity of financial insecurity in the United States (made acutely evident by the COVID-19 pandemic), employers have increasingly focused on providing financial wellness benefits and tools to enable employees to save for emergencies. Unsurprisingly, the companies that provide benefits to these employers, such as retirement recordkeepers, increasingly offer such products.
Commonwealth has been working toward making emergency savings tools ubiquitous in the retirement system. As a first step, we partnered with recordkeepers and their employer customers on the design of innovative, practical product solutions. Now we are expanding our focus to include retirement plan advisors (RPAs) who play a key role in supporting emergency savings. The primary function of RPAs is to work with employers and establish plans for meeting the financial needs of employees for a secure retirement.
We are working to engage with RPAs, sharing our learnings and insights from three years of research on emergency savings and gaining an understanding of their perceptions. Specifically, we are focusing on how emergency savings products reduce expense and income shocks experienced by employees.
Commonwealth recently partnered with NMG Consulting, who conducted a survey of 607 RPAs and interviews with 20 RPAs; we collaborated to include questions aimed at understanding their perceptions of emergency savings.¹
The surveys revealed several myths that are currently held about emergency savings in retirement plans by RPAs. Below we share data from this research, and provide recent evidence-based insights about the state of emergency savings in the retirement plan industry.
Emergency Savings Myths Held by RPAs
Our research indicates that plan participants with separate emergency savings accounts weathered the COVID-19 crisis better while also protecting core retirement assets.
- Myth #1: Plan sponsors are unfamiliar with both the concept of supporting employees in emergency savings and the available emergency savings products.
Reality: Plan sponsor and recordkeeper interest in saving is, in fact, growing. - Myth #2: Plan participants are not interested in building emergency savings.
Reality: Saving for emergencies and receiving employer support is a high priority for plan participants. - Myth #3: Emergency savings do not help plan participants build long-term savings or retirement.
Reality: Emergency savings can protect retirement savings from loans or withdrawals. - Myth #4: Emergency savings offerings are complicated and introduce an added cost for plan sponsors.
Reality: Neither in-plan nor out-of-plan solutions present a high cost to plan sponsors.
Myth #1:
Plan sponsors are unfamiliar with both the concept of supporting employees in emergency savings and the available emergency savings products.
Plan sponsor and recordkeeper interest in emergency savings solutions is, in fact, growing. Commonwealth research found that most top recordkeepers are determining how, not if, to offer emergency savings: eight of the nine recordkeepers interviewed as part of the research either offer or are planning to offer an emergency savings product.
Several of these recordkeepers also shared that plan sponsors have increasingly expressed interest in recordkeeper-offered emergency savings tools, a trend that has accelerated during the COVID-19 pandemic. Plan sponsor demand has been the driver of new product adoption in the past. Therefore, this growing demand will be an integral factor in emergency savings solutions being offered by recordkeepers.
RPAs Perceptions from Survey Data
Financial wellness is a priority for some RPAs when engaging directly with plan participants. However, respondents do not often think of offering an emergency savings solution as an aspect of supporting plan participant financial wellness.
About 75% of advisors surveyed reported they were somewhat or very interested in financial wellness content, compared with only 55% somewhat or very interested in emergency savings. Budgeting tools ranked as more attractive than the more actionable emergency savings tools. Budgeting does not help consumers and more targeted tools that provide real-time data linked to actions, like saving for emergencies, perform better.
Myth #2:
Plan participants are not interested in building emergency savings
Interest in saving for emergencies and receiving employer support in saving for emergencies is actually a high priority among plan participants. In 2018, 71% of employees surveyed by AARP reported that they would be likely to participate in an employer-based rainy-day savings program.
RPAs Perceptions from Survey Data
In NMG’s survey, many RPAs similarly saw the benefit of providing emergency savings solutions to employees. RPAs find they make the employer’s benefits package more attractive (65% of respondents selecting it as a major benefit of offering emergency savings), reducing employee financial stress (60%), and increasing employee engagement with the retirement plan (60%).
In interviews however, RPAs echoed this myth; questioning whether plan participants would even take advantage of these benefits or be interested in savings products. One RPA described “instant gratification [as] a real hurdle to emergency savings,” with another adding that plan participants do not want support in saving for emergencies because “they don’t want to know” how far behind they are in saving for emergencies. RPAs also expressed concern that emergency savings would cannibalize retirement savings, with it being “just hard enough to get plan participants to contribute” to their retirement plan.
Myth #3:
In a survey of low- and moderate-income plan participants, respondents who had a significant amount of liquid savings (over $2,000) were half as likely to have taken a 401(k) loan or hardship withdrawal in response to the COVID-19 pandemic
Emergency savings do not help plan participants build long-term savings or retirement savings.
Commonwealth research found that emergency savings helps to protect retirement savings. In a survey of low- and moderate-income plan participants, respondents who had a significant amount of liquid savings (over $2,000) were half as likely to have taken a 401(k) loan or hardship withdrawal in response to the COVID-19 pandemic. Emergency and retirement savings are not mutually exclusive: building emergency savings can help support building retirement savings.
Plan participants can first approach saving for frequent and inevitable expense shocks (e.g., unexpected medical expense or unusually high heating bill) to build short-term financial stability and then, once that is achieved, begin saving for larger expense shocks (e.g., income reduction due to job loss). This approach can protect retirement savings from loans or withdrawals, as plan participants tap and rebuild more liquid funds rather than retirement savings.
RPA Perception from Survey
The lack of emphasis by RPAs on emergency savings as an important part of the retirement conversation may be driven by RPA concerns about how to recommend an unfamiliar financial product. RPAs rank plan sponsors’ lack of familiarity with the concept of emergency savings solutions as a top barrier to plan sponsors offering emergency savings (44%), with 15% of advisors ranking it as the top barrier to adoption.
Our research indicates that plan participants with separate emergency savings accounts weathered the COVID-19 crisis better and protected core retirement assets.
In a survey of low- and moderate-income plan participants, respondents who had a significant amount of liquid savings (over $2,000) were half as likely to have taken a 401(k) loan or hardship withdrawal in response to the COVID-19 pandemic
Myth #4:
Neither in-plan nor out-of-plan solutions present a high cost to plan sponsors. Leading recordkeepers such as Voya, John Hancock, and Prudential all offer in-plan or out-of-plan emergency savings options.
Emergency savings are complicated and introduce an expensive cost for plan sponsors.
Recordkeepers and plan sponsors increasingly see emergency savings options as a powerful way to reduce loan and hardship withdrawals and maintain employee retirement security. Recordkeepers can offer in-plan emergency savings options, such as repurposing after-tax contributions for emergency savings, or out-of-plan options, where recordkeepers can partner with a financial institution.
Recordkeepers can also leverage an existing non-retirement account plan sponsor’s offer (e.g., a cash management account) to offer a liquid savings account alongside, but not within, the retirement plan. Neither in-plan nor out-of-plan solutions present a high cost to plan sponsors. Leading recordkeepers such as Voya, John Hancock, and Prudential all offer in-plan or out-of-plan emergency savings options.
RPAs Perceptions from Survey
In NMG’s survey, the potential cost to employers of recordkeeper-provided emergency savings options was cited as the top barrier to plan sponsor adoption (51%), with 22% of RPAs ranking it at the top. In interviews, RPAs also cited concerns that addressing fiduciary risks could become burdensome, and there is some hesitation around work that involves an aspect of financial security beyond retirement saving.
NMG’s survey—in comparison to our research on recordkeepers and plan sponsors—indicates that RPAs seem less aware of how emergency savings reduce the costs and administrative burdens of pathways for retirement monies coming out early, like loans and hardship withdrawals. Recently, Voya shared research indicating plan participants who take a loan or hardship take more money than they need indicating the problem of using the retirement account for emergencies.
Neither in-plan nor out-of-plan solutions present a high cost to plan sponsors. Leading recordkeepers such as Voya, John Hancock, and Prudential all offer in-plan or out-of-plan emergency savings options.
Next Steps
RPAs can join with recordkeepers and plan sponsors in playing a key role in helping Americans build emergency savings.
To support plan sponsors and recordkeepers on emergency savings options, RPAs have a unique opportunity to get smart on this area, learn about solutions, and advise their plan participants by using clear research-backed features and a criteria of quality “expense shock” emergency savings. These features include:
- Low or no fees for employees, with no barriers to entry or use, such as requisite minimum account balances
- Liquid and easily accessible funds so that employees can withdraw them as often as they face emergencies and as soon as possible after facing an expense or income shock
- Portability between employers so that employees can continue to use the funds and contribute to the account if they leave an employer
- Automatic payroll deduction, such as after-tax contributions that are deducted automatically from a plan participant’s paycheck each pay cycle
RPAs can also advise plan sponsors and recordkeepers on devising options to match both emergency savings and retirement contributions. Where possible, plan sponsors have the opportunity to match employees’ after-tax contributions with employer pre-tax contributions as well.
The retirement industry is well on its way to offering emergency savings as a key feature of workplace retirement plans. RPAs have an opportunity to join in and support plan sponsors in preparing plan participants to save for emergencies, prepare for income and expense shocks in the short term, and build resilience, savings, and retirement in the long term.
Commonwealth is continuing to conduct research and develop best practices for offering emergency savings products in retirement plans. If you are a plan sponsor, recordkeeper, or RPA interested in learning more, please contact Commonwealth’s Nick Maynard at nmaynard@buildcommonwealth.org.
NMG Consulting is a multinational consulting firm focusing solely on wealth, asset management, and reinsurance markets. RPAs help employers select and manage retirement plan offerings. They include retirement investment advisors (such as CapTrust or Pensionmark); advisors employed by independent broker dealers (such as Cetera and Raymond James); advisors employed by wirehouses (such as Merrill Lynch or Morgan Stanley); and advisors employed by banks (such as Regions Bank or PNC).
¹ The RPAs surveyed were grouped based on their shares of practice revenue coming from Defined Contribution (DC) plan fees. Light: <20%, Medium: 20% – 59%, and Heavy: >60%) as well as differing amounts dedicated to sell and service plans (Light: <5M, Medium: <25M, and Heavy:<100M). Light RPAs have less than 20% of practice revenue coming from DC Plan fees, with a wealth focus, while Medium RPAs are transitioning to a DC focus and Heavy RPAs are fully committed.
BlackRock’s Emergency Savings Initiative
In 2019, BlackRock announced a multi-year, $50 million philanthropic commitment to help millions of people living on low- to- moderate incomes gain access to and increase usage of proven savings strategies and tools – ultimately helping them establish an important safety net. The Emergency Savings Initiative (ESI) is a key part of The BlackRock Foundation’s mission to help people beyond the firm’s core business to build financial security. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions at the individual and corporate levels. Led by its Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give ESI a comprehensive and multilayered approach to addressing the savings crisis.
