By Nick Maynard

Retirement plan recordkeepers are increasingly aware of the need for employee financial wellness programs, rating them among their top 3 priorities for 2019 and as a key aspect of retirement preparation. With the consolidation of the recordkeeping industry and increasing employer demand for more holistic financial wellness programs, offering an emergency savings program would create a competitive advantage for recordkeepers.

Commonwealth has researched and tested successful emergency savings interventions and sees recordkeepers, given their current infrastructure and position with employers, as having a unique opportunity to enable short-term savings. Recordkeepers are already tackling new areas of employee benefits, like student debt, and can leverage this framework and pathway for emergency savings.

Offering emergency savings programs to the 94MM Americans with access to employee-sponsored retirement plans represents a unique, as yet untapped opportunity.

Respond to Employer Demand and Reduce Employee Financial Stress Through Emergency Savings

Through Commonwealth’s research around emergency savings and discussions with plan sponsors and recordkeepers, we have identified four key reasons for recordkeepers to begin to tackle the emergency savings problem for the employees they serve.

1. Respond to employer demand. Employers and plan sponsors are increasingly aware of the business value of financial wellness initiatives, such as facilitating emergency savings. These initiatives serve to decrease financial stress among employees, resulting in improved productivity and performance. As a result, employers increasingly demand that recordkeepers  build out solutions for employee financial wellness programs.
2. Decrease hardship withdrawals. A 2018 ETrade Financial report indicated that the percent of people who withdrew from their 401(k) plans has doubled since 2015. The 2018 Bipartisan Budget Act has accelerated this trend, with some recordkeepers estimating a 40% increase in 401(k) withdrawals in the first few months of 2019. Because early withdrawals from 401(k)s are often used for emergency expenses, the provision of an emergency savings account would reduce the need for 401(k) withdrawals.
3. Leverage large scale channels to help solve the emergency savings crisis. Working across multiple employers, recordkeepers are well-positioned to help solve the emergency savings problem. They have economies of scale and many are not only recordkeepers but also have investment businesses.
4. Improve customer engagement. An emergency savings program would increase customer retention by improving the stickiness of recordkeepers’ platforms. The more employees engage with the platform, the more likely they are to open new accounts and invest in proprietary ETFs (the main revenue source for asset manager recordkeepers), and the less likely they are to move funds out of the account upon switching employers.

Features for an Ideal Emergency Savings Product

To be successful, an emergency savings product should be approached differently from retirement savings. An effective emergency savings tool does not focus on accumulation toward a target amount. Instead, it has liquidity that can be built, used, and rebuilt. By solving short-term cash needs, emergency savings accounts enable retirement savings to remain intact and continue to accumulate.

In our research, Commonwealth has established some features that an ideal emergency savings product as offered by a recordkeeper would include:

1. Liquidity: Liquidity is key. Having immediate access to funds allows employees to address financial issues quickly before they lead to any additional costs: for instance, high costs of car repair only increase if the delay to fix the car requires missed work.
2. Build, Use and Rebuild: Accounts should be able to be built up and withdrawn regularly (even daily), both in order to encourage savings as a behavior and to accommodate financial emergencies of all types defined by the account holder. Unlike 401(k)s, emergency savings accounts are not intended to be used as wealth-building vehicles. Instead, their value comes in smoothing financial bumps in the road and preventing unforeseeable expenses from ballooning into insurmountable debt.
3. Low or No Fee: Fees for withdrawing from emergency savings funds or falling below minimum balances reduce trust in financial institutions, exacerbate financial emergencies, and may discourage users from withdrawing when they really need it.
4. Sidecar as a Potential Product Structure: Sidecar savings accounts set aside part of an employee’s after-tax income into a liquid emergency account up until a certain amount, at which point the contributions begin going into a retirement account. This option for account structure pairs well with existing 401(k) accounts.

Beyond these baseline elements, innovations such as prizes, auto-enrollment, and gamification drive stronger engagement with an emergency savings account.

Join Us in the Conversation

Retirement plan recordkeepers should seize this significant opportunity to provide a differentiating feature to their employer customers and the people who work for them–one which provides both social and business value.

Through the BlackRock Emergency Savings Initiative, Commonwealth and its partners are exploring the introduction of new emergency savings solutions at scale. We are collaborating with a variety of stakeholders, from fintech startups to large employers in all sectors. Email Nick Maynard at esi@buildcommonwealth.org to learn more about our emergency savings work and potential partnership opportunities.