An automated strategy
to meet a basic need
By Thomas A. McCoy, CLU
The simplest, safest and, possibly, most utilized financial tool for individuals of all income levels is an emergency savings account. All it requires to implement is the forethought to deposit funds into an insured financial institution and to wait, hopefully a long time, for unexpected miscellaneous emergencies.
Still, too many working adults have overlooked this responsibility.
“We estimate, based on available research, that more than half of working-age employees could not absorb a $1,000 emergency hit to their savings account,” says Josh Rundle, chief product officer of Transamerica. “We see the ramifications of that coming through our 401(k)s and Health Savings Accounts (HSAs), where they’re having to dip into those assets far too early.”
Planning for financial emergencies traditionally has been handled personally, outside the workplace. However, as part of the current trend toward financial wellness initiatives, such as student loan assistance and financial counseling for employees, employers are showing increased interest in helping employees save money for short-term financial emergencies.
“It’s a universal need in the workplace,” says Rundle. “It applies to small and large businesses, corporate and nonprofits. They see the crisis. They see the 401(k) loans coming out, the hardship withdrawals coming out, and many of those withdrawals are coming out for reasons that would be deemed an emergency event, often-times health-related.”
Transamerica recently introduced a Workplace Emergency Savings Account as a benefit plan solution to this problem. Under the program, an employer deducts an after-tax amount chosen by plan participants from their paychecks. Funds in the employee’s account are FDIC-insured, earn interest and, just like a savings account at a bank are available without penalty to the participating employee at any time.
The automatic contributions to the savings plan can be stopped or started at any time; any withdrawals are anonymous; and when the employee leaves the employer, they take their emergency funds with them. The employer has the option of making contributions to participants’ accounts through matches or ad hoc contributions.
The emergency savings plan is part of Transamerica’s suite of financial wellness products that also includes an HSA, an individual health coverage health reimbursement account and student loan assistance.
“We believe that the first step in building a financial plan for retirement is to make sure it’s protected, and that’s where the emergency savings fund comes in.”
Kent Callahan, CEO of Workplace Solutions at Transamerica, says, “Employers realize that individual employees’ financial stress can impact productivity, retention and overall health significantly. Emergency savings accounts offered through the workplace are perfectly positioned to help people address life’s unexpected events and reduce their financial stress.”
Transamerica is offering its emergency savings account program through strategic relationships with two organizations: Millennium Trust, a digital solutions provider of retirement and financial services with $44.1 billion in total assets under custody; and SecureSave, a financial technology platform co-founded by financial advisor Suze Orman. A plan sponsor selects one of these two companies to manage its savings program.
“We vetted numerous partners, and by selecting these two we’ve tried to ease the process for employers and advisors, so they don’t have to assess the entire market, negotiate institutional pricing and vet their partners,” says Rundle.
He points to data from SecureSave showing that among employers offering emergency savings accounts, the employee participation rate is 50%, and more than 90% of those users were keeping that money in the program. “That level of participation for a voluntary product tells us that there’s a real need among our end customers for the product.”
Those employers who choose to make voluntary contributions would undoubtedly boost employee participation further, Rundle notes.
For employers wishing to incentivize their savings plan, SecureSave suggests on its website, “There’s no need to complicate it. The simpler the match, the better, and large amounts are not required. Our research has shown that employees were highly motivated at amounts as low as $50 to $200 per year.”
“At this early stage we already see strong interest among employers in providing emergency savings assistance,” says Rundle. “As we continue to grow our emergency savings accounts, we want to look at how it can be integrated with our education programs, during enrollment, and through our advisory services.
“We work with a handful of enrollment platforms where we’ve integrated our retirement and employee benefits. We plan to include the emergency savings product in that enrollment process, so we’ll have a more holistic conversation about the plan participant’s needs.
“So, when they’re looking at their paycheck and figuring out where the dollars go, they can first make sure they save to protect themselves against the unexpected—‘what do I do if the washer or dryer gives out, or the transmission in my car goes out?’ The emergency savings account is going to have downstream effects—on their retirement plan, their Health Savings Account, and other benefits choices.”
What could enhance the appeal of emergency savings accounts considerably would be the enactment of legislative proposals currently being considered by Congress. A Senate bill, the Rise & Shine Act, would allow employers to automatically enroll employees in an emergency savings plan up to 3% of their salaries, up to a maximum of $2,500. Before becoming law, it must be reconciled with the Secure 2.0 Act, which was previously passed by the House.
“We hope the Rise & Shine Act and Secure 2.0 will be a force for driving awareness and acceptance by employers,” says Rundle. “As awareness grows, we think there will be more opportunities for emergency savings plans, particularly at the point of enrollment. That’s where the question can be asked, ‘Do you have an emergency savings plan set up?’
“As this issue is being taken up in Congress, it’s important to continue to educate people about why this is such an important issue for Americans. It’s eye-opening to look at the statistics and see how much of a need there is. The financial stresses employees feel are affecting their productivity, even more so in the inflationary environment we’re now in.”
It’s been a wild two-and-a-half years for personal savings. The nation’s overall personal savings rate, as measured by the U.S. Department of Commerce Bureau of Economic Analysis, swung from 7.8% in January of 2020 to 33.7% in April of 2020 in the early stages of the pandemic. It was 9.4% in September 2021, and by April 2022 it had retreated to 4.4%.
However, individual workers may have adjusted their money savings habits in this pandemic era; it’s likely they’ve gained new appreciation for the importance of both long-term and short-term savings. Employers, for their part, have demonstrated increasing interest in employee wellness, including financial wellness, which extends beyond the retirement plan.
“We believe that the first step in building a financial plan for retirement is to make sure it’s protected, and that’s where the emergency savings fund comes in,” says Rundle.
Thomas A. McCoy, CLU, is an Indiana-based freelance insurance writer.