Emergency Savings Accounts Could Be Next Big Thing for Employers
By Madison Alder
Fido needs surgery and that vet bill will be hefty. There’s money in my 401(k), so I’ll just use some of that. It won’t hurt, right?
When the need for emergency funds comes up, as it does for many Americans, taking a hardship withdrawal from the 401(k) plan can look like an attractive option. And that’s led to more and more people taking money out of retirement funds without paying it back. This is known as leakage.
A group of researchers will be exploring how leakage can be stopped if employers sponsor emergency savings accounts for their workers.
Employees may be more inclined to save for both retirement and emergencies if there’s an account available specifically for emergency use, J. Mark Iwry, a former senior adviser in the Treasury Department and one of six researchers working on the report, said May 11. Iwry, a nonresident fellow of economic studies at the Brookings Institution, was speaking at the American Bar Association’s Tax Section conference in Washington.
Meanwhile, the tax law signed in February loosens the evaluation requirements for employers considering employees’ 401(k) hardship withdrawal requests. A regulation is due within a year of the law’s enactment.
Many employees don’t use a 401(k) option out of fear that their savings will be out of reach in the event of an emergency, Iwry said. For some of those who do have 401(k) plans, leakage will reduce them. It’s by no means an epidemic, but “there’s more leakage than we’d prefer,” Iwry said.
Separate From or Linked to 401(k) Plans
In an effort to solve this problem, he said, employers might try offering employees an emergency savings account—either separate from or attached to the 401(k)—specifically designed to be used in emergencies. The researchers are currently looking for employers to share their thoughts and test these methods out, Iwry said.
The study was prompted by the fact that many American families are living paycheck to paycheck, he said. About 44 percent of Americans surveyed by the Federal Reserve in a 2017 study said they would have to borrow money or sell something if an emergency arose.
“That financial vulnerability might be addressed in part by an emergency savings or rainy day savings account,” Iwry said. “That could help people cope with these economic shocks and also free them up to save for retirement without concern that doing so would lock up their savings and make it unavailable for emergencies.”
The other researchers on the study are David Laibson, an economics professor at Harvard; Brigitte C. Madrian, a public policy and corporate management professor at Harvard; David John, a senior strategic policy adviser at the AARP Public Policy Institute; James J. Choi, a finance professor at Yale; and John Beshears, an associate professor at Harvard.
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