PLANADVISER - November/December 2019 - 20

Almost 20% of large employers-those with 500 or more
employees-now offer some type of help with emergency
savings, an EBRI survey found. " What we see, more and
more, is that if people can take care of their short-term
emergencies financially, they're better able to save for their
retirement, " Copeland says.
When they do save, Americans most often save for their
retirement, because of the ease of doing so through their
employer plan, Copeland says. " It tends to be the dominant
way of saving for Americans, because the money comes
directly out of their paycheck. " He says, similarly, using
payroll deductions for emergency savings could help Americans
build up a second savings bucket.
Here, experts discuss three main models for emergency
savings that, at least in part, could be implemented by
employers:
1
Rainy-day savings account within a
401(k). According to Prosperity Now,
it need not be used for emergencies. " Part of the education
program will be about having this source of money geared
for emergencies. But the expectation is that the money is
there to be used, not built up. "
The paper from Prosperity Now, which collaborated with
Prudential on developing its pilot program, says this approach
has several potential benefits. These include the logistical
ease, compared with the other two models, for employers
that already sponsor a retirement plan, because employees
will not need a new account. It is also relatively simple for
providers that already facilitate after-tax contributions.
Plus this approach simplifies emergency saving for
employees, says David Newville, Prosperity Now's vice
president, policy and research, in an interview. " The
predominant way most Americans save is through their
employer's retirement plan, " he says. " The money
comes out of their paycheck, and they can
kind of forget about it. "
a nonprofit research and advocacy
group that detailed the three models
in a recent paper, employees may
create an emergency savings account
within their 401(k) account. Using
this approach, they can make both
pre-tax and after-tax elective contributions
under the same 401(k) plan
umbrella, says the paper, " Saving for
Now and Saving for Later. " After-tax
contributions accumulate earnings on a
tax-deferred basis, and an amount equal
to the employee's contributions may be withdrawn
free of taxes or penalties. An employee's
pre-tax contributions would be separate and function
as part of the traditional 401(k).
Prudential Retirement currently is testing the concept
" We are
trying to minimize
people tapping
into their retirement
savings for
other issues. "
2
Rainy-day
savings
alongside a 401(k).
account
account
In the
second approach, the emergency
account is a Roth sidecar individual
retirement
(IRA)-aka
a
deemed IRA-repurposed for emergency
saving. These accounts are
owned by workers participating in
an employer-sponsored plan and are
essentially attached to and offered
through it. The account retains the
character of an IRA but can have economies
of scale through commingled investment
with the employer plan, which is potentially
cheaper for participants.
" The option that is the easiest for employers is likely the
of an emergency savings account within a 401(k) plan. " We
started our pilot program in mid-2018, with 15 clients, "
Dalessio says. " We'll bring another 10 to 20 clients online in
the program in the next few months. "
Because many state wage-withholding laws limit an
employer's ability to automatically enroll employees into
after-tax savings, employees need to sign up for the emergency
savings feature, Dalessio says. With this approach,
a 401(k) account has both a short-term focus (emergency
savings) and a long-term focus (retirement savings); both
have fiduciary oversight. " The idea is that employees can go
to one place to save, with a payroll deduction. We felt this is
a very simple solution, and people want simple. "
Prudential hopes that incorporating emergency savings
into a 401(k) plan will help reduce leakage. " We are trying
to minimize people tapping into their retirement savings for
other issues, " Dalessio says. " For most people, that's where
their money is, and that's where they go when they have
an emergency. The thinking is that if they have money in
their plan earmarked for emergencies, they'll be less likely
to take a loan or hardship withdrawal. "
Account holders may withdraw the money in their aftertax
emergency savings account for any reason, Dalessio says;
after-tax savings account feature that, in many cases, was
set up by employers before the 401(k) even started, " says
David John, senior strategic policy adviser at the AARP
Public Policy Institute in Washington, D.C. " It's fairly easy to
repurpose those as emergency savings accounts if the plan
documents allow for it. " And if not, he says, it is simple to
change the plan documents to do so.
" It's an interesting idea and certainly worth employers
experimenting with, " says George Barany, America Saves
director at the Consumer Federation of America, also in
Washington, of having an inside-the-plan IRA earmarked
for emergency savings. " One size doesn't fit all, and we need
to explore multiple opportunities for emergency saving. "
3
Rainy-day savings account separate from a 401(k).
The third model is a rainy-day savings account independent
from a 401(k). This approach could take the form
of a traditional individual savings account, or a reloadable
prepaid or payroll card tied to an account administered
by a bank, credit union or payroll-card provider retained
by the employer, according to the Prosperity Now paper,
which notes that a number of employers and third-party
financial providers are currently implementing some form
of this approach.
20 | planadviser.com November-December 2019
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