A big part of financial wellness is having an emergency savings account. However, according to a 2018 survey, 5.5 million Americans reported they had no money saved at all. As a result, many employees end up borrowing from their 401(k) accounts when an unexpected need arises – which is not a solution employers would prefer.
In a recent Employee Benefit News article, Terry Dunne, managing director of retirement services at Millennium Trust, answered questions about how and why employers should help their workforce start and nurture an emergency savings account.
Why should employers care if their workers have emergency savings?
Lots of reasons, [but first] I’d say that financial wellness is the right thing to do for the individual and the company. Focusing on financial wellness makes a big difference with regards to minimizing the stress level of employees. Obviously, if employees are stressed about finances, they’re not as productive as they could be. And if it’s important to employees that their job provides this benefit, from a competitive standpoint you’d better have it or they’ll go somewhere else.
Also, if employees don’t have emergency savings they’re probably going to dip into their 401(k) and other retirement accounts. You don’t want that.
So employers should be worried about whether or not their employees will retire on time?
Absolutely. The longer it takes an employee to retire, the more companies spend on their medical insurance. It’s already hard for folks to retire on time; if they’re withdrawing from their retirement savings early, and incurring tax penalties as a result, it’s only going to take longer. Better to have them set up with an emergency savings account they can use when something breaks, or a spouse loses their job.
Explain what an automatic emergency savings benefit is. How does it work?
It’s basically the same as health and other benefits deducted from your paycheck. The employee chooses how much they want withheld each pay period, and that gets deducted from each check and placed into a separate account. People usually have savings accounts at their own bank or credit union, but they don’t always have the discipline to regularly contribute. This way, it’s done automatically. The balance racks up faster than you think. If employees accumulate, let’s say $100 or $200 per paycheck, the money can grow to $2,500 or more each year. Maybe it takes three or four years to have the suggested amount you need in emergency savings, but it’s a good start.
What’s the best way for employers to provide this benefit?
Our suggestion is after-tax accounts. It’s much easier for people to understand, there’s no withdrawal penalties and it accumulates interest. Plus employees will have easy access to the funds if they need them. It’s as simple as if it were their own checking account.
Employers should partner with a financial institution that has experience growing smaller accounts; it’ll make a big difference for your employees’ savings.