You might have seen the photo: It shows a mile-long line of cars on a New Jersey turnpike, one of the more well-off states. It’s people waiting in line to get food from a food bank. The same scenes are being played out all over America, in California, Florida, Pennsylvania, Massachusetts, Texas. These are people who up until mid-March had been gainfully employed, paying their taxes, making their monthly mortgage payments.
“This is where Americans are now, financially,” said Commonwealth Executive Director Tim Flacke in a webinar on the future of emergency savings, hosted by TPSU, DCIIA and SPARK, that also included AARP’ Senior Strategic Policy Advisor David John, and Christine Lange, Prudential Financial’s head of retirement business management and customers solutions.
The three discussed ways to look at emergency accounts, what features they must include, regulatory issues, and more.
1. No longer “Break Glass in Case of Emergency.”
We saw a preview of such food bank distribution scenes during 2019′s federal shutdown, when moderate income federal workers missed one or two paychecks and were plunged into a financial disaster. Back then the idea of emergency savings was the metaphor of “break glass in case of an emergency” — emergency savings as the fire alarm switch or fire extinguisher placed behind glass and accessible only in a drastic situation.
But in fact, that idea of “break glass in an emergency” might not be the best or only way to help people who need emergency savings. The savings might not be for one massive event. They might be for a seemingly minor one, like a grocery stocker getting a flat on the way to work and not having the money to fix it and not being able to get to his or her job.
2. Shock absorber or buffer.
Emergency savings need to be seen as more of a “shock absorber,” Flacke said during a recent webinar co-hosted by TPSU, DCIIA and SPARK. “Or a buffer. You build up some reserves when you do have some more income.That might mean you had a good week or extra hours on the schedule. You build it up and draw it down. Use, rebuild, use, rebuild. That’s different from a break-the-glass event.”
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Another way to look at it is as preventive medicine, he said, to prevent more costly solutions such as taking out loans from retirement plans or high interest loans from other sources. “The lesson of COVID-19 is not that we need to design for the next pandemic. Maybe we do. The lesson is to expose that most of us don’t have a fallback position, a way to fix the flat tire to be able to get o work. We need to focus on that, not apocalyptic scenarios.”
3. Not reinventing checking accounts.
“The COVID-19 crisis has changed the scale, but doesn’t change the fact that we have smaller emergencies we deal with on a day-to-day basis,” said David John, Senior Strategic Policy Advisor at the AARP.
But there has to be a sense that it is an emergency, added Christine Lange, Prudential’s head of retirement business management customer solutions. “If you’re putting away money into a savings account and your’re constantly using it for daily things such as food, it’s not an emergency savings account.”
Behavioral research shows that people do mental accounting. They want different boxes to categorize their money. And savings versus emergency is one way that helps some to think about it. But people lack a solution that’s one step above checking accounts, Flacke said. “We are not reinventing checking accounts. People get that it’s smart to save. The challenge is that it is hard and they often lack the tools.”
4. Retirement plan infrastructure already there.
“In the shock absorber use case, it’s hard to find a product that will help,” Flacke said. “You can’t walk into a bank and say ‘I want to withdraw and deposit money weekly.’ The bank will say ‘we will charge you a monthly fee.’ The retirement plan system offers an existing structure to help people build up stock and draw down when they need it.”
The employer sponsored retirement account is already the primary savings vehicle for many people, Lange pointed out. “Setting up something in the retirement plan means it’s far enough away from your checking account so you don’t use it often, but close enough so you can use it if you need to.” She discussed how Prudential came out with a savings vehicle to help employees meet short-term needs while still focusing on saving for their future retirement. “The idea is it is still using the retirement plan infrastructure, with access to low-cost institutional investment options. But if workers don’t use the emergency money, it keeps growing.”
5. Features that offer employees control.
There’s already enough shame around financial wellness or lack of, in the U.S. So features that should be offered in an emergency savings account solution include ones that give employees control and discretion, and include these:
- Immediate access: Emergency savings accounts need to offer a worker immediate access, with very low or no fees.
- Automatic features or other ways to set aside money: They need to have automatic features, so workers can easily sign up and every time a deposit such as a paycheck is made, some amount goes automatically into another account, or there are features that round up purchases or other actions and that amount goes into savings.
- Employers don’t know when an account is accessed or why.
- Employer contribution would be a helpful option for motivating some workers.
- Workers want it to be their money and to be able to take it with them if they leave an employer.
- Workers want control over the ability to start or stop saving or change the amount.
- Workers want to be able to withdraw the money at any time, to use as they see fit.
The last three conditions were the most important qualities to ensure participation, AARP found, after completing a survey of employees age 25 to 64. It found that 70% of employees across all income scales and across all demographics would participate if those features were part of a solution, John said. “We had had discussions as to whether there should be a ‘circuit breaker,’ something that says ‘are you sure this is really an emergency, do you really want that?’ It would be a huge mistake. Individuals need to decide for themselves what an emergency is.”
On the other hand, AARP’s survey found that people were indifferent as to whether the emergency savings earned anything or not. They were more interested in having their money available to them.
6. Regulations pose a problem.
The way regulations are administered is a problem, and they need to be revised to make this easier, simpler, and cheaper. And unless there is a clear statement from regulators that this is allowed, employers will shy away from it, John said. AARP identified three possible models of emergency savings accounts and the regulatory complications around them:
- Used in retirement plan using after-tax 401(k) feature. Complications: Tax liability issues could be complex for individuals.
- Using Imputed Roth IRA within 401(k), an artificial sub-account. Complications: Many, including QDIA issues.
- Separate parallel savings account with a bank or credit union using a payroll card. Complications: Well-meaning regulations not allowing use of auto-enrollment.
7. Be smart when talking to employees about emergency savings.
Studies come out every day about how Americans aren’t doing a good job with finances. But wrist-slapping won’t help. Here are some ways to bring up emergency savings programs with workers:
- It’s not about the employer. “Don’t talk to them about ‘this wonderful thing your employer is doing,’” Flacke said.
- Come from a position of problem-solving and empathy, not judging. “For most workers, they feel like they are doing their best and working hard but still facing financial stress,” he added.
- Meet people where they are now. “If you’re living your financial life in the present, it is difficult to be excited by a much longer term goal like retirement,” Flacke said.
- Consider offering an employer contribution. “That was the ‘super feature’,” John said, about the AARP survey results. “Of the roughly 30% of people who said they weren’t interested in an emergency savings program, 80% said they would participate if that was offered.”