Emergency savings accounts funded by payroll deductions improve financial well-being

updated on October 22, 2020

FFinancial stress affects the ability of workers to stay motivated and do their jobs, and for many employees, the COVID-19 pandemic has only added to that stress. Some employers are taking steps to ease the financial burden on employees by implementing Emergency Savings Accounts (ESAs) that allow automatic deposits through payroll deductions, much like the way employees fund their accounts. 401 (k).

ESAs and how they work

Whether you call them Emergency Savings Accounts, Emergency Fund Accounts, Rainy Day Accounts, or even Side Accounts, this savings option is recognized by employers as an effective way to help employees set aside money that they can access later in an emergency, such as the COVID-19 crisis. And while there are differences between some of these terms, Dave Amendola, a consultant at Willis Towers Watson who has helped clients assess ESAs, said the central concept is “to help employees save directly for one. emergency event or to develop savings funds to handle financial emergencies, as opposed to saving for retirement.

Most employees are already familiar with how 401 (k) contributions work, and ESAs are funded the same way. The difference with ESAs, however, is that dollars deducted from employee paychecks are taxed as income, do not have to remain deposited long-term, and are therefore available to employees in immediate financial need.

Launch of new products

New ESA products are now available, such as the one introduced by Businessolver, a benefits management technology company. These programs allow employees to have funds deducted from their paychecks, after taxes have been paid, in amounts of their choice and to access these funds at any time without penalty by debit card or wire transfer. Employers can offer the accounts as part of their benefits enrollment process.

Accounts “are a way for employers to encourage healthy savings habits for their employees in tandem with other consumer accounts and benefit offerings,” said Rae Shanahan, chief strategy officer for Businessolver.

Phil Mason, COO and Director of UMB Healthcare Services in Overland Park, Kan., Said that “adding this vehicle to existing items such as health savings accounts and 401 (k) s is another way for employers to help employees achieve their goals. overall savings goals. “

The pandemic increases interest

“There are a lot of employees who are not saving for, or are not prepared to handle, a financial emergency,” Amendola said. The problem emerged particularly during the pandemic, when employees in the United States were put on leave or saw their wages cut or hours reduced following closures and the economic crisis brought on by the COVID outbreak. -19.

Jonathan Price, senior vice president and head of corporate retirement practices at Segal, a benefit consulting firm, explained that “having an employer-facilitated ‘pocket emergency fund’ helps employees to avoid high-interest payday loans or prevent them from tapping into long-term savings ”, especially since the CARES (Coronavirus Aid, Relief, and Economic Security) law has made it easier to withdraw from retirement plans.

Amendola said that financial resilience “helps employees cope with difficult life events that can, and are likely to occur, during their professional careers. Employers have started to focus on these savings accounts. emergency as one of the levers they can use to help employees become more financially resilient. ” The pandemic, he added, “made this evident very clearly.”

Emergency or retirement savings

ESAs can prevent workers from accessing their retirement funds earlier, ensuring that their retirement funds are available when they reach retirement age.

In a white paper from November 2019,
Build emergency savings with employer-sponsored savings accounts, researchers from Harvard, Yale and Brigham Young universities; the Wharton School at the University of Pennsylvania; AARP; and the National Bureaus of Economic Research concluded that “having separate retirement savings and retirement savings accounts can facilitate greater savings for short- and long-term purposes by helping to psychologically separate and catalyze these savings. two reasons for saving ”. Offering both ESAs and 401 (k) plans, for example, can “reduce the frequency with which short-term needs crowd out long-term retirement savings.”

On the other hand, some fear that ESAs will discourage or reduce employee savings in traditional retirement accounts.

Nonetheless, Price said at Segal, employers offering ESAs can send a strong message to workers about their concern for the financial well-being of employees. “By offering an automatic deposit system, an employer is helping employees use the power of inertia to their advantage,” he said. “Literally, by taking no future action, an employee improves their personal financial security.”

401 (k) “Side accounts” are another approach

The so-called sidecar accounts, which Prudential began offering in 2018 and which are now available from other 401 (k) service companies, are additions to retirement savings plans. By sharing a common platform with a 401 (k) plan, once the after-tax money reaches an employee’s comfort level in the parallel savings account, future payroll deductions can be allocated to employee retirement savings using pre-tax dollars.

A potential downside can be that in some cases participants may not be able to withdraw funds immediately. Although the delay may be slight, just a few days it could be an inconvenience for some.

Watch before you jump

Unlike regular savings accounts set up in banks or savings banks, with ESAs there are “problems with paying contributions and how they are withdrawn, and nuances that can potentially be difficult to communicate to employees, ”Amendola said.

He advised plan sponsors to consider the following:

  • If they want to configure the ESA to work through auto-enrollment (see “A green light for auto-enrollment programs”, below).
  • Whether employer contributions will be included once the account reaches a certain threshold.
  • So contributions can spill over into other types of contributions or investment vehicles once accounts have reached a certain level of savings.
  • What might be the impact of these accounts on existing pension plan accounts.

“Plan sponsors should at least be prepared to take a step back and try to understand the different options they may have and how those options might fit… into their benefits and financial wellness strategies,” Amendola said.

A green light for automatic backup programs

Regulatory uncertainty over whether employers were allowed to set up employee savings accounts funded by payroll deductions – and, in particular, automatically enroll employees in the program – was resolved in July when the Federal Bureau for Financial Consumer Protection (CFPB) has issued guidelines in a Compliance Assistance. Template for Statement of Conditions (CAST).

Employers interested in creating an automatic savings program (autosave) to help employees build emergency savings can use the CAST model as a basis for applying to receive CFPB approval to create such a program. The guidelines were released in response to a request from Commonwealth, a nonprofit organization that works to promote savings and wealth accumulation for low and moderate income people, in conjunction with the service company financiers BlackRock’s Emergency Savings Initiative.

The CFPB guidelines “clarify a long-standing federal rule, Regulation E, which has been an obstacle to employers implementing automatic enrollment in emergency savings programs for their workers,” he said. said Jason Ewas, senior policy director at Commonwealth. The guidelines “make it easier for employers to apply for CFPB approval to add an automatic registration program to their benefits.”

As part of an automatic registration program, Ewas explained, new and existing employees will be able to direct a portion of their income to an account at a financial institution of their choice. “If an employee does not designate an account after receiving a notice and after a reasonable period of time, the employer would create an automatic savings account for the employee at an establishment designated by the employer,” he noted.

“While employees have been able to divide their deposit into checks and savings in the past, this is the first time that the door has been opened for employers to automatically enroll employees in savings, the same way they do. a 401 (k), with the employee having to opt out instead of registering, ”he said. “We know from research that the more automatic the savings process, the more likely people are to save, from emergency savings to retirement.”

UPS launches emergency savings account for 90,000 employees

On October 22, global shipping and logistics provider UPS announced the launch of an emergency savings account program for its 90,000 non-union employees based in the United States. The initiative offers them a way to set aside liquid after-tax savings easily and automatically, in tandem with their 401 (k) pension plan administered by Voya Financial.

UPS, which joined BlackRock’s Emergency Savings Initiative in 2019, worked with the National Commonwealth nonprofit to design and implement the program. Commonwealth data shows that plan members who save during the pandemic are half as likely to retire in an emergency.

Qualifying UPS employees will automatically be able to contribute emergency savings directly to the after-tax account, which is on a platform shared with their 401 (k) plan with Voya Financial. The after-tax account is a separate side account that is not subject to the 401 (k) restrictions on withdrawals.

“At UPS, we’re committed to helping our employees save,” said BJ Dorfman, director of global retirement strategy. “We value our workers and understand that their financial security is an important part of their success on the job and our success as a company.

Lin Grensing-Pophal is a freelance writer in Chippewa Falls, Wisconsin.

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