What is the financial impact of COVID-19 on low- to-moderate-income people? What do plan sponsors and recordkeepers need to know about emergency savings solutions to make informed decisions? What are the pros and cons of different types of emergency savings products?
These were some of the questions we answered in our webinar, Pandemic-Imposed Financial Strain: Innovations in Retirement & Emergency Savings, hosted by the Defined Contribution Institutional Investment Association (DCIIA) with speakers Sylvia Brown, Senior Innovation Strategist at Commonwealth, and Catherine Wright, Senior Innovation Manager at Commonwealth.
Our speakers shared insights from our series of surveys on the financial impact of COVID-19 on low-to-moderate-income (LMI) plan participants conducted by Commonwealth and DCIIA’s Retirement Research Center (RRC).
Three surveys conducted in May, July, and September demonstrate persistent financial strain as we near a year into the financial crisis. About 1,500 LMI respondents earning between $20,000 and $75,000 answered questions about their financial lives, including approaches toward saving for emergencies and retirement during the pandemic. Since February, 60 percent of respondents saved for emergencies and 53 percent withdrew from emergency savings accounts. Only 7 percent of respondents have taken a loan or withdrawal from their retirement account.
Moderated by Warren Cormier, Executive Director of DCIIA’s RRC, the webinar emphasized that 1 in 3 respondents had decreased income from pre-pandemic levels every month from April to September. Respondents who reported lost income during the pandemic were twice as likely to withdraw from emergency savings.
Research from our series of surveys presented in the webinar further illustrated how emergency saving programs offer a financial cushion amidst widespread uncertainty and prevent 401(K) leakage. One such program began last fall when, in close collaboration with Commonwealth, UPS partnered with Blackrock’s Emergency Savings Initiative to launch an emergency savings program for its 90,000 US-based, non-union employees. Recordkeepers and plan sponsors are wondering how they too can best support employees in saving for both emergencies and retirement.
Three key takeaways from the webinar include:
1. Emergency savings products must be accessible and easy to use. Plan sponsors and recordkeepers should pay close attention to research-backed design features, whether offering an in-plan or out-of-plan emergency savings solution. Commonwealth’s research on emergency savings identified 10 factors that help tailor emergency savings solutions for maximum benefit. They are:
- no barriers to entry,
- no required minimum account balance,
- low or no fees, no restrictions (especially around withdrawals/usage),
- liquid (i.e., easy withdrawal),
- transparency around all account features,
- active marketing, portability, principal-protection, and
- the ability to auto-enroll employees (where legal).
2. Emergency savings benefit all. According to Mercer’s Inside Employees’ Mind study, “Employees who are offered a financial wellness program through their employer are twice as likely to report being very satisfied with their job and their employer, and are more than twice as likely to trust their employer to do what’s right.” Offering emergency savings solutions benefits employees, recordkeepers, and plan sponsors, increasing customer engagement and retention. Offering well-designed and executed employee savings programs also helps meet calls for businesses to support workers during COVID-19.
3. When evaluating in- and out-of-plan solutions, consider plan sponsor and plan participant needs. There are pros and cons to both in-plan and out-of-plan solutions. An out-of-plan approach, offered through a financial institution or fintech, avoids existing recordkeeping technology constraints and earnings taxation requirements. However, an out-of-plan option may require an up-front investment in a solution that is separate from the retirement plan and add friction for plan participants, who would have to set up a new banking relationship with a separate financial institution.
On the other hand, the in-plan approach allows for quick repurposing of pre-existing accounts within the plan (after-tax or Roth IRAs); and easy integration with payroll to enable automated saving with every paycheck and conveniently locating emergency and retirement savings on the same platform. Disadvantages to an in-plan option include less liquid withdrawal, taxation, and 10% penalty on earnings, and additional work for recordkeepers to edit their platform’s user experience to suit the new emergency savings offering.
The pandemic’s acceleration of widespread financial insecurity has increased demand for employer assistance and driven fresh interest in emergency savings programs. Our research indicated that LMI plan participants are actively building and tapping emergency savings during the COVID-19 financial crisis and therefore need products that support their frequent contributions and withdrawals.
We will continue to track LMI plan participants’ actions in the coming months. Check our website for new research or sign up for our newsletter here to receive our posts and final reports as soon as they are released. Through BlackRock’s Emergency Savings Initiative, Commonwealth and its partners are exploring the introduction of new emergency savings solutions at scale, including working with recordkeepers to develop and launch emergency savings tools both in-plan and out-of-plan. If you are a plan sponsor or recordkeeper interested in offering emergency savings and would like to learn more about how you can support your plan participants, contact Nick Maynard at info@buildcommonwealth.org.