As a new year approaches and employers consider additional ways to improve their culture and address ongoing issues affecting the overall health and stability of their organizations, there’s one in-plain-sight option that can have monumental ROI.

Emergency savings.

More specifically, access to emergency savings through retirement accounts.

Commonwealth’s research as part of BlackRock’s Emergency Savings Initiative has shown that one of the most important and effective workplace benefits for improving financial security is emergency savings—particularly for those earning low to moderate incomes (LMI).

Emergency savings improves long-term financial security for more workers

Post-pandemic and amidst current inflation, those earning LMI—disproportionately Black, Latinx, and women-led households—have fewer liquid funds available to absorb financial shocks of $400 or more. Consequently, workers often draw down their retirement savings when a financial emergency arises. Not only do they face significant fees and penalties when accessing these funds, but they also risk their ability to retire on time.

By creating easier access to penalty-free emergency savings options tied to retirement accounts, employers can broaden the reach of retirement savings overall. Embedding emergency savings into retirement plans advances financial security and can directly contribute to closing the wealth gap.

What the data tells us

According to EBRI’s 2024 Financial Wellbeing Employer Survey, only 4 in 10 retirement plan participants have emergency savings, yet 70% of workers think having emergency savings through their employer would be appealing. Currently, one-third of companies offer an emergency savings benefit, and 40% of employers want to offer it in the future. These statistics reflect a trifecta—a need, a willingness, and a desire from employers and employees—indicating the potential for positive and impactful outcomes with increased offerings.

Under SECURE 2.0, two provisions address emergency savings: one allows a $1,000 withdrawal from retirement savings without penalty, and the other enrolls employees into pension-linked emergency savings accounts (PLESA). While the policy outlines how these options can work, there’s a significant need to build these options into more plans so employers can increase the adoption and integration of these provisions. Feedback from focus groups conducted by Commonwealth in early 2024 showed a clear preference among workers for the $2,500 PLESA option over the $1,000 withdrawal option.

Moreover, research has shown that attaching emergency savings to retirement via an in-plan, after-tax account not only helps individuals save for emergencies but also encourages participation in retirement savings. For instance, in our work with UPS and Voya, we observed a 39% increase in plan participants during the first year the benefit was offered and a 25% increase in overall assets—a nearly $10 million rise in new savings.

This existing in-plan after-tax model serves as a blueprint for building the PLESA option under SECURE 2.0, allowing workers to save up to $2,500 in an attached account.

Best practices for offering high-quality workplace emergency savings

In addition to increasing accessibility to emergency savings accounts for workers earning LMI, the PLESA option incorporates key features preferred by these workers, as outlined in research by Commonwealth and DCIIA:

• Low barrier to access: Participants can withdraw funds from their PLESA at their discretion without needing to demonstrate an emergency;
• No fees: PLESA withdrawals are exempt from the 10% early withdrawal penalty on retirement accounts and are treated as qualified distributions, meaning the entire amount is tax-free for employees;
• Automatic paycheck saving: Contributions are collected the same way as retirement account contributions—automatically deducted from paychecks and routed to the emergency savings account by employers; and
• Liquid and immediate access: The full amount of emergency savings, up to $2,500, is available for withdrawal via ACH, typically within 2–5 business days.
• Another best practice for employers offering PLESA is auto-enrollment, where employees are automatically enrolled in the benefit but have the option to opt out if they choose.

How to approach incorporating emergency savings into your benefits strategy

Employers are eager to offer emergency savings benefits to their workers—not only to enhance financial security but also to reduce worker financial stress, improve productivity, boost retention, and aid recruiting efforts, ultimately enriching the organization’s overall culture. Now is the time to build and implement strategies as outlined in SECURE 2.0 to meet this growing demand. So where do you start?

• Ask your workforce – Learn about your workforce’s financial challenges and solution preferences through a benefits survey. One solution might not fit all workers’ needs—and exploring multiple solutions may be the right path forward. In a recent emergency savings pilot with a major employer in the auto industry, the program included three solutions: split deposit, a payroll-linked savings account, and an in-plan after-tax option linked to retirement savings.
• Explore your current benefits vendor landscape – Employers and plan sponsors may already have access to a high-quality emergency savings solution through a current benefits provider, such as their payroll provider, 529 provider, or recordkeeper.
• Talk with your retirement plan adviser – An adviser can assist plan sponsors and recordkeepers to connect and implement emergency savings solutions in the workplace.
• Together with BlackRock’s Emergency Savings Initiative, Commonwealth continues to partner with employers to pilot innovative emergency savings programs that help overcome barriers, identify opportunities, demonstrate best practices, and inform policy.

Leaning into both emergency and retirement savings is critical for workers’ financial security—and providing emergency savings is a pathway to get there. In BlackRock’s Read on Retirement survey, 64% of respondents said they would save more for retirement if they had a safety net of liquid, short-term savings set aside for retirement.

Knowing that workers earning low and moderate income who have emergency savings are 70% more likely to participate in defined contribution plans, the potential impact is clear: increased liquid savings, reduced retirement leakage, and greater retirement savings participation. Additionally, you are demonstrating support for the entirety of your workforce by recognizing their individual financial circumstances and offering benefits that address them.

Originally published on BenefitsPro.