The Connection Between Emergency Savings Accounts and Retirement

Research shows that for low- and moderate-income workers, access to emergency savings accounts is likely to bolster retirement contributions and provide greater financial security.

 

Plan sponsors can help drive higher retirement plan contributions from workers by offering robust emergency savings accounts that hew to their preferences, research from a pair of nonprofits shows.

The survey, “Emergency Savings Features That Work for Employees Earning Low to Moderate Incomes,” found that for the demographic, the lack of access to emergency savings accounts hinders workers’ retirement plan participation. Published by Commonwealth and the Defined Contribution Institutional Investment Association Retirement Research Center, the survey highlights the connection between emergency savings accounts and retirement savings and identifies low fees and fast access to their money as the features that low- and moderate-income workers want from workplace emergency savings programs.

The research shows that workers with emergency savings were 70% more likely to contribute to a defined contribution retirement plan.

“Workers earning low to moderate incomes face a lack of access to high-quality, low-cost savings tools,” the survey report states. “Plan sponsors and recordkeepers are in a unique position to offer these tools to help their workers to save and weather financial challenges. Plan sponsors and service providers are also uniquely positioned to connect savings to the regular paycheck.”

Plan sponsors and recordkeepers have an opportunity to help boost the financial security of low- and moderate-income workers by incorporating preferred features into emergency savings options, the survey found.

“Plan sponsors and recordkeepers should tailor solutions with a focus on providing liquidity with no fees, minimum balance requirements, or penalties,” the report states. “In a space without emergency savings auto-enrollment, employers should also encourage program sign-ups through multiple modes including email updates, benefit workshops, and HR presentations. Increased communication is needed, and incentives can help engage employees and fuel savings.”

Access to emergency savings also makes these workers less likely to act in ways that jeopardize their future financial security, the report states, noting that individuals with emergency savings are “less likely to have accumulated debt” or to have “prematurely tapped retirement savings.”

The survey examined respondents’ top three preferences in potential features of an emergency savings option, and found that 34% want no fees, 17% prefer no minimum balance required and 16% favor a plan that enables account holders to immediately withdraw their funds.

The survey also found that “no fees in an emergency savings solution was preferred at least two times more than any other option and was as much as four times more preferred than some features,” according to the report.

The Commonwealth and DCIIA RRC qualitative and quantitative research was conducted in the first quarter of 2022. The survey used focus groups of DC plan participants, followed by a quantitative study that surveyed nearly 1,000 individuals living on low and moderate incomes, which are defined in the report as annual earnings between $20,000 and  $75,000.

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