Emergency Savings Programs Boost Retirement Outcomes

A report from DCIIA and Commonwealth suggests that emergency savings should be placed in an account that is distinct from funds intended for long-term retirement savings.

A report from the Defined Contribution Institutional Investment Association and Commonwealth gives insight into the progress the retirement industry has made on developing and implementing emergency savings solutions.

“Retirement Industry Leaders on Emergency Savings” notes that while emergency savings solutions may vary in their exact approach, one clear takeaway is that adequate emergency funds are an important part of financial wellness and financial security. The solutions currently in place and those that are being created are guided by two key insights, the report adds. The first insight says that emergency savings should be their own “bucket,” meaning funds are placed in an account that is distinct from funds intended for long-term retirement savings. The second insight says that well-designed emergency savings accounts are effective buffers against early withdrawals from retirement savings.

“Ideally, public policy will be supportive of further evolution in emergency savings solutions by providing clarity to plan sponsors, recordkeepers and other providers as to important guidelines and best practices,” the report says. “One significant development would be explicitly allowing for automatic enrollment into emergency savings vehicles.”

The report found that the general consensus is that emergency savings solutions should enable short-term savings with liquidity and preserve long-term savings. Most of the solutions highlighted in the report offer a dedicated account distinct from retirement savings that is either outside of the retirement plan as a standalone account or inside of the plan but separate from the core retirement assets.

The report further suggests that households that save in an account dedicated exclusively to emergency savings are more likely to have a higher amount of liquid savings than those who save but don’t have a dedicated emergency savings account. Throughout the pandemic, households with at least $1,000 in liquid emergency savings were half as likely to withdraw from their workplace retirement savings accounts.

“Legislation should support emergency savings solutions that are separate from retirement savings. The accounts should be flexible and allow people to save for the types of financial challenges they experience,” the report says. “This is particularly important for households headed by people of color, who were more likely to have lower incomes coming into the pandemic and to see their income decrease.”

Adding liquidity features into core retirement assets can carry risk for both the industry and the consumer, DCIIA and Commonwealth say. Data suggests that hardship withdrawals are being used as a substitute for emergency savings, with almost half of those who took such a withdrawal saying they took too much in hindsight.

Policymakers should ensure that rules for emergency savings actually support the preservation of retirement funds by keeping retirement savings safe from leakage, the report suggests. Additionally, policymakers have a unique opportunity to improve retirement security and financial wellbeing by enabling greater access to emergency savings and supporting the models that are already in the market, the report concludes.

The report urges policymakers to support emergency saving models that allow for automatic enrollment, ensure emergency savings are their own “bucket” of savings and allow for a wide range of options—particularly for low- to moderate-income households.