Addressing the Lack of Emergency Savings
Introduction:
Millions of Americans find themselves without a financial safety net, leaving them vulnerable to unexpected expenses. However, companies are recognizing the importance of helping their employees establish emergency savings to alleviate financial stress and improve overall well-being.
The Impact of Financial Stress on the Workforce:
Financial stress has a significant impact on employees, affecting productivity, absenteeism, turnover rates, and ultimately the company’s bottom line. According to a survey by the Employee Benefit Research Institute, 47 percent of employees cited insufficient funds for emergencies as one of their primary sources of financial stress. Furthermore, only 40 percent believed they could handle an unexpected expense of $500, while a mere 20 percent felt prepared for a $5,000 emergency.
Employers Taking Action:
To address this issue, employers are adopting various strategies to assist their employees in establishing emergency savings. One such approach involves enabling workers to set up automatic payroll deductions into dedicated emergency accounts. Fidelity Investments, a leading provider of 401(k) plans, recently introduced Goal Booster, allowing employees to deposit small amounts, such as $20 per week, directly from their paychecks into an emergency fund. Additionally, employers can offer matching funds or other incentives to encourage savings.
Employer Examples:
Delta Air Lines has implemented Goal Booster for its employees. By setting up an account and completing a financial education program, employees receive a $750 kick-start towards their emergency savings. Moreover, Delta matches up to $250 of employee contributions. Fidelity has partnered with other prominent employers like Starbucks and Whole Foods, with plans to add 24 more by year-end.
The Consumer Federation of America’s Contribution:
The Consumer Federation of America is also stepping in to assist employers through its resource called Split to Save. This free tool enables companies to set up automated savings accounts for their workers, further facilitating the establishment of emergency funds.
SECURE Act 2.0:
The SECURE Act 2.0, enacted in 2022, includes a provision allowing employers offering retirement plans to provide special Roth accounts that employees can tap into for emergencies. Eligible employees can contribute up to $2,500 annually and make up to four tax- and penalty-free withdrawals per year. While the IRS has provided guidance on implementing these accounts, it may take time for employers to offer them due to the associated rules and recordkeeping requirements.
Determining Adequate Emergency Savings:
Whether individuals create emergency savings accounts through their employers or independently, it is crucial to have enough funds to cover several months’ worth of living expenses. Sole wage earners should strive for 6-12 months’ worth of expenses, while dual-income households may be able to get by with 3-6 months. However, if both partners work in sectors sensitive to economic downturns, it may be necessary to save more.
Investing Emergency Funds:
Emergency reserves should be placed in low-risk accounts that are immediately accessible. Since the timing of emergencies is uncertain, it is essential to have funds readily available when needed.
Conclusion:
By recognizing the importance of emergency savings and implementing programs like Goal Booster and Split to Save, employers are actively addressing the financial stress faced by their workforce. With these initiatives, employees can establish a safety net that offers peace of mind, improves productivity, and ultimately benefits both individuals and companies alike.
