In a matter of months, the economic devastation of the COVID-19 pandemic has plunged millions of people living in the US into deeper financial insecurity. Pre-pandemic, many Americans struggled to build and maintain emergency savings for even a minor unexpected expense, let alone months-long business closures and mass layoffs. Employers understand that their employees need support now, but employer-sponsored retirement plans are not currently designed to address their immediate needs.

The pandemic provides a moment to rethink employer-sponsored savings accounts in their present format. At the moment, because employer-sponsored accounts focus on retirement, they leave behind a large percentage of people with low to moderate incomes (LMI) who do not have access to them. They also fail to capture a significant number of people of color and women who are even less likely to have them. The need for action from the private, public, and nonprofit sectors to address this savings gap is clearer now than ever before. Employers can lead the way by offering emergency savings solutions that reach their employees earning LMI.

In our work through BlackRock’s Emergency Savings Initiative, Commonwealth partners with employers to test and scale emergency savings solutions. One question employers often ask is:

“How should an employer develop an emergency savings solution?”

The straightforward option: they can work with their recordkeepers and financial institutions to develop effective savings products. Employers can either choose to build off their existing retirement plans, known as in-plan accounts, or create stand-alone plans, known as out-of-plan accounts. In this blog post, we will discuss these two types of accounts, the benefits and challenges of each, and how employers and recordkeepers can create high-quality savings products that ultimately work for people living on lower incomes.

The key components of a high-quality emergency savings product include:

• Liquidity—same-day, if not instant, access to funds
• Portable—easily transferred to a new employer or when an individual leaves the workforce 
• Principal-protected—an employee’s contributions will not lose their value
• Low- or no-fee—they meet small-dollar savings requirements for employees
• Transparent—terms and conditions are clearly communicated in easy-to-understand language

Stand Alone (Out-of-Plan) Emergency Savings Accounts

Offering stand-alone, or out-of-plan, emergency savings accounts can reach retirement plan participants, non-participants, and employees who do not qualify for participation in the 401k plan. Put simply, they can reach most people who are employed. These accounts can be designed in various ways based on the needs and preferences of the employer.

Employers can choose from a range of account options, but the most promising are traditional financial institution savings accounts, cash management accounts, and payroll cards. Many of these accounts are easy to access, portable, and principal protected (see call-out box above). There are also many options that are no or low cost and that offer transparent features. Employers should make a conscious effort to select high-quality accounts.

Out-of-plan solutions also allow recordkeeper firms to market and message emergency savings directly to employees separate from retirement.

In-Plan Emergency Savings Accounts

By offering in-plan emergency savings accounts, employers can take advantage of already established technology and infrastructure allowing for auto-enrollment and paycheck deduction.

As stated above, however, a large number of people living on LMI do not currently have access to an employer-sponsored retirement plan, posing a significant challenge to uptake. After-tax accounts also tend to take longer to access and are less portable than most out-of-plan options. This can make them less ideal as emergency savings tools.

That said, if an in-plan, after-tax solution is intentionally designed to reach and work well for people living on lower incomes, it can likely be an effective vehicle for delivering emergency savings.

Importance of Program Design

Making the decision on account type is a necessary step towards developing effective emergency savings solutions. Employers should also consider design choices that improve engagement and usage. One proven example is prize-linked savings, which has been demonstrated at scale through Walmart’s Prize Savings program.

Messaging is also critical. It should promote or advance a financial security mindset—positioning financial security as a journey, emphasizing agency, and presenting attainable aspirations. In addition, the messaging must be segmented and designed for different groups, including 401k participants, non-participants, and employees who do not qualify for the 401k but need an emergency savings benefit.

The Moment to Act

A recent survey found that Americans’ “biggest coronavirus financial regret” was not having enough emergency savings. In many ways, the pandemic and recent widespread recognition of racial injustice have opened up new opportunities to emerge from this unprecedented moment of crisis stronger. Employers are now in a position to help a significant number of people living on LMI access the savings they need now. By partnering with their recordkeepers and/or financial institutions, employers can develop high-quality savings products that people need today.

Americans’ financial lives are challenging enough as it is, but in today’s rapidly-changing environment, emergency savings solutions are more necessary than ever before. Employers can take this moment to rethink the retirement-focused savings account and deliver savings solutions built for the realities of today.