Unequal Financial Experiences Highlight Need for Different Emergency Savings Solutions

“Although some Americans have recovered from pandemic-related financial hardship or gone through the pandemic without any, many others are still trying to find new work or remain at a reduced income level,” a survey report from Commonwealth says.

The survey found that the ongoing economic hardship brought on by the COVID-19 pandemic has disproportionately fallen on certain groups, specifically women, people of color, and low- and moderate-income (LMI) adults. The report authors say their stories “may be buried by national averages about increased savings and decreased unemployment rates.”

Ed Farrington, head of retirement and institutional investing at Natixis Investment Managers, recently discussed with PLANSPONSOR how COVID-19’s effect on retirement savings has highlighted the issue of income inequality in the U.S.

To find out more about that income inequality, Commonwealth, in partnership with the Defined Contribution Institutional Investment Association (DCIIA)’s Retirement Research Center, surveyed LMI retirement plan participants (those with $20,000 to $75,000 in annual household income). They found respondents with lower income before the pandemic—as measured by annual household income in 2019—were more likely to see their income decrease during the pandemic. Forty-one percent of respondents making $20,000 to $30,000 lost income during the pandemic, versus 31% of respondents making more than $30,000.

Non-white respondents, who are also more likely to have had lower income coming into the pandemic, were more likely to see their income decrease, with 41% of non-white respondents having lower income versus 29% of white respondents. The report authors note that the two groups—those who have lost income and those who have not—are roughly the same age on average (46 years old).

Respondents who have lost income during the pandemic are more than twice as likely (35% vs. 14% of respondents who have not lost income during the pandemic) to have taken or plan to take a “negative retirement action,” which includes reducing their contribution rate, pausing or stopping contributions, taking a loan from their account, and/or taking a withdrawal from their account. In addition, respondents who lost income are three times as likely to have had their debt increase since February 1, 2020, (48% vs. 16% of people who have not lost income during the pandemic), and, in particular, are much more likely to have had their credit card debt increase (41% vs. 12%).

The survey also found respondents who lost income during the pandemic are more likely to have withdrawn from their emergency savings during the pandemic (66%) than those who did not lose income during the pandemic (40%). They are also more likely to have decreased their expenses (77% vs. 52%), borrowed from friends or family (16% vs. 4%) and sold any possessions (21% vs. 7%).

Authors of the survey report, Warren Cormier, DCIIA; Nick Maynard, Commonwealth; and Sylvia Brown, Commonwealth, say retirement plan recordkeepers and sponsors can help participants by:

• Providing employee hardship funds;
• Connecting employees with guidance on repaying debt;
• Encouraging intermittent saving where their budgets allow; and
• Setting up emergency savings products through their platforms so participants can begin saving for emergencies when they are able to do so.

Commonwealth is a partner in BlackRock’s Emergency Savings Initiative (ESI), a $50 million philanthropic commitment to help people living on low to moderate incomes gain access to and increase their use of savings strategies and tools, not just within retirement plans. In addition to Commonwealth, BlackRock has partnered with Common Cents Lab and the Financial Health Network to give the initiative a comprehensive and multilayered approach to address the savings crisis.

The firm recently announced new partners to the initiative, including ADP, Best Buy, Self, Truist and Varo. ADP is leveraging employee-centric research through its work with Commonwealth to test emergency savings features through Wisely by ADP. Best Buy is evaluating its current employee savings program through an employee survey and interviews to identify opportunities to enhance the program and increase participation.

Self, a financial technology company with a mission to help people build credit, worked with the ESI to review and deploy a savings brand campaign and is integrating research into new product development. Truist, a bank, will help clients build emergency savings by launching new solutions that are a core part of its purpose to inspire and build better lives and communities. Varo, a digital bank, is working with BlackRock’s ESI to help customers automatically save more out of every paycheck.

“It’s clear that widespread economic insecurity is not a result of individual choices but rather structural barriers that often make financial stability an unreachable goal,” says Deborah Winshel, global head of social impact at BlackRock and president of the BlackRock Foundation. “We’re ensuring that savings solutions are tailored to the financial lives of low- to moderate-income households and our growing coalition of partners can help us put these solutions into the hands of even more people who have faced systemic barriers to financial security.”