Broadcast Retirement Network’s Jeffrey Snyder discusses the implementation of emergency savings within 401k (or 403b or 457b) retirement planswith Commonwealth’s Nick Maynard and T. Rowe Price’s Rachel Weker.
Jeffrey Snyder, Broadcast Retirement Network
Joining me now is Nick Maynard of Commonwealth and Rachel Weker of T. Broke Price. Rachel, Nick, great to see you.
Thanks for joining us this morning. Thanks. It’s always great to see you guys.
And look, I love talking about workplace emergency savings and also retirement security. Nick, I want to come to you. I think Commonwealth has a very interesting perspective on this.
How important is workplace employee savings plans? Has it become a pillar for retirement security?
Nick Maynard, Commonwealth
Yeah, Jeff, at this point I’d say emergency savings in the workplace has moved from a nice to have to a standard pillar of retirement security. The relationship between the two is pretty clearly defined at this point. So the conversation has shifted from what we’ve seen as to whether emergency savings does or does not belong next to retirement, but more to how do we design it effectively.
And design effectively means thinking about how do we increase participation, both for non-participants and increasing the amount of money saved in retirement for those participating today, as well as reducing leakage from the plan. Ultimately, emergency savings serves both the short and long-term financial wellness by improving retirement security. And real-world data supports this.
Commonwealth research has found that those with emergency savings are 70% more likely to contribute to a defined contribution plan. That’s significant.
Jeffrey Snyder, Broadcast Retirement Network
And Rachel Iberpreis is one of the top retirement plan service providers, or as we used to call them, record keepers, but you do a lot more now. What’s your perspective? Because I have to think that clients are asking about this.
Workplace employee savings plans are really important.
Rachel Weker, T. Rowe Price
Absolutely. And I would say that consistent with Commonwealth’s experience, we’re also seeing that connection between the meaningful existence of emergency savings and successful retirement outcomes. And our retirement plan participants who tell us they have six months of emergency savings are two times less likely to have taken a loan from their plan.
They have higher retirement savings rates and 2.3 times on average higher average balances than those who don’t have those emergency savings. Our global retirement spending and savings survey tells us that respondents who indicate they know they’re not saving enough for retirement, one of the primary reasons that they’re not able to do that is they’re focused on building up emergency savings. So it’s a really important recognition of the trade-off that many people have to do between focusing on their near-term needs and that longer-term retirement success.
And the scope of this issue is really broad. 69% of participants tell us they don’t have six months of emergency savings saved up and 47% say they can’t even cover $1,000 emergency expense.
Jeffrey Snyder, Broadcast Retirement Network
Yeah and Rachel just to kind of follow up on that affordability has been such a huge issue I would imagine that fewer priced clients have come and asked what can we do to help with affordability increase our productivity and help employees save?
Rachel Weker, T. Rowe Price
Yeah absolutely I would say they there are two really big reasons that plan sponsors want to talk to us about emergency savings and how they can help their employees and the number one reason for that is they want to look for opportunities to reduce loans and hardship withdrawals and we’ve been talking about that for a really long time in the retirement space but it’s only fairly recently that we’re recognizing that connection between loan behavior and the absence of effective emergency savings and we know it’s also not only an issue for the younger employee population as people get older you see increased loan usage rates as well as larger account balances for those loans so it really is a broad issue. The second reason we hear employers telling us they want to talk about emergency savings is exactly what you just talked about and that is concern around financial stress and our research shows that inflationunemployment and interest rates are significant factors in driving that financial stress and you’d have to imagine that the existence of a meaningful emergency savings balance is going to help ease some of that stress.
Jeffrey Snyder, Broadcast Retirement Network
Yeah and Nick I mean you go all around the United States talking to your clients or commonwealth clients excuse me I would imagine a similar experience clients are asking for this they need they want this and their participants their employees need it.
Nick Maynard, Commonwealth
We echo in our work a lot of what Rachel and T. Rowe are seeing from the plant sponsor side we know that emergency savings benefits in the workplace are in high demand both from participants and non-participants in the retirement plan. In recent research we found that 54% of workers agree that employers should provide access to emergency savings in the workplace there’s a cocktail there of trust with the employer as well as the need for emergency savings.
We also hear like Rachel spoke about that a consistent starting point for plan sponsors is wanting to reduce using the retirement plan for emergency savings meaning leakage so using hardship loans hardship withdrawals and loans and then plan sponsors recognize that it’s not only critical need and important to build the financial wellness journey around emergency savings but also seeing that link to retirement and thinking about how you design an offer so that you impact retirement security positively.
So we hear plan sponsors are thinking about a variety of approaches both in plan out of plan a combination of both in some cases and it really varies based on the plan sponsor and the needs of their force. So for example one plan sponsor is choosing to offer savings benefits both in and out of plan which is not always that common sometimes it’s just sort of let’s do one or the other but as Rachel noted plan sponsors have a true north around offering emergency savings that will reduce the financial stress that they’re seeing among their employees.
Jeffrey Snyder, Broadcast Retirement Network
Nick you know we retirement savings and retirement security has been in the news lately we just had that recently had the State of the Union address person to talk about the national 401k plan is public policy catching up with these needs the needs of affordability while the affordability issue but also creating workplace emergency savings plans in retirement security.
Nick Maynard, Commonwealth
Jeff the answer is yes retirement policy is now explicitly recognizing that emergencies are negatively impacting retirement security and the secure 2.0 act passed in 2022 is the clearest signal of that two key mechanisms were created in secure 2.0 one the 1,000 penalty-free emergency expense withdrawal and the second the pension linked emergency savings accounts or plessa. The first is built off of learnings that the industry has from the cares act and it can help in varying ways it can act as a first stop to prevent the leakage that we’ve been talking about when an emergency expense arises and it can also reduce psychological barriers to participation by creating that little bit of a sense that some money is available in the retirement plan if something unexpected comes along. Now in contrast the plessa is designed to sit as a separate emergency savings account acting as a sidecar as it’s often referred to to the retirement savings in the DC plan both allow penalty-free access without forcing a retirement distribution and both are designed to maintain ongoing retirement contributions from the employees paycheck when money is taken out in either instance. So policy is also adapting to what they’re hearing from record keepers as well they haven’t sort of stopped there and a new bill by Senators Booker and Young tackles some of the retirement industry suggested tweaks to that pension linked emergency savings account or plessa with the goal of increasing the industry’s offerings to plan sponsors.
The new bill in particular first increases the savings cap to five thousand from two thousand five hundred and second removes the highly compensated employee HCE exclusion.
Jeffrey Snyder, Broadcast Retirement Network
And Rachel I mean Baltimore is not that far from Washington DC Washington DC is would like to say from Baltimore. Kira Price has been a big advocate of retirement savings same question for you has the policy caught up with the needs of retirement plan sponsors and their participants.
Rachel Weker, T. Rowe Price
We’re really excited about all of the developments that Nick was just referring to and as we share our experience talking with employers about the plessa specifically and share that experience with lawmakers the two areas that Nick just referenced are exactly the ones that plan sponsors who have been interested in plessa have identified as the biggest reason that they’re not comfortable yet moving forward.
So we’re really excited about the development that they appear to be addressing that we see the same level of interest from Washington and an appreciation of the need to evolve that policy to adapt to the challenges and the issues that we’re hearing from our plan sponsors as well.
Jeffrey Snyder, Broadcast Retirement Network
Yeah and Rachel I mean Nick talked about secure secure 1.0 secure 2.0 are the policies aligning with the real world. So I mean you have a lot of practical you and the team at T-Row have a lot of practical knowledge are the public policy decisions the creation of these new programs are they aligning with what the initiatives purposes were.
Rachel Weker, T. Rowe Price
The examples in our experience that demonstrates that alignment is related to providing access to that $1,000 emergency withdrawal provision. We are seeing for plan sponsors who have elected to make that available higher participation rates in those plans that provide access versus not 76% participation rate and plans that provide access versus 67. So not necessarily a causal relationship but definitely a really strong correlation and the great news I think is that while participants are responding to that it doesn’t mean they’re necessarily now taking full advantage of the ability to remove the money from the plan.
So less than 1% of participants are taking advantage of that taking those withdrawals from the plan. The average withdrawal amount $943 and on average seeing those withdrawals repaid over two and a half months. So I think it speaks strongly to the alignment between the policy and the needs but also the fact that we haven’t seen come to fruition the concern that you just now changed the retirement plan into a piggy bank.
Jeffrey Snyder, Broadcast Retirement Network
Yeah and Nick I mean same question for you has the rubber met the road in terms of policy and implementation that’s pretty key.
Nick Maynard, Commonwealth
Yeah so as Rachel said starting with the 1000 emergency withdrawal provision we’ve seen that many plan sponsors have offered this data from one industry-wide organization said about 36% of plan sponsors have adopted the provision and we’ve also been able to gather some learnings from our real-world demonstration with employers of this feature and some of these observations include that we’ve seen that the implementation of the feature varies quite widely across the retirement industry so this makes the user experience different depending on who the record keeper is for some folks it could be either call center engagement some it can be paper forms other it can be through online access and then in terms of plan sponsors a very common concern which Rachel mentioned is this is point about with the 1000 emergency withdrawal lead to further leakage.
While time will tell regarding the impact because leakage plays out over an extended period of time we’re not seeing any negative impacts on that front so far but in addition the real-world demonstrations with at least one large employer have shown really two fascinating outcomes one is that marketing the 1000 emergency withdrawal feature by the employer to those folks that are not participating can increase participation in a non auto enroll environment probably that psychological point that I mentioned earlier helping people overcome the hurdle of the money feeling locked up and then secondly similar to what Rachel shared 90% of folks paid back the amount that they had withdrawn and that’s built on the structure of the tool which allows the ongoing contributions into the account as after the money has been taken out so overall we’ve learned that rather than serve as an emergency savings account per se that’s not exactly what this feature the 1000 does it does help address immediate liquidity needs that can derail retirement security and in this case we’re seeing that it continues retirement contributions and can potentially even attract folks to the retirement account