New research recommends Pension-Linked Emergency Savings Accounts over other kinds of emergency savings accounts as a vehicle to help low- and moderate-income employees manage expenses.

A group of 20 individuals who earn less than $80,000 annually reported wanting to establish emergency savings accounts and want options from their employers to build critical emergency savings, finds new research from Commonwealth, called “Employee Perspectives on SECURE 2.0 Emergency Expense Provisions.”

Commonwealth’s research inquired what employees in this earnings group think about the emergency savings provisions offered in the 2022 law and their preferred option, explains Brian Gilmore, a vice president at the national nonprofit.

Key research takeaways were “respondents in the focus groups reacted positively to both of the provisions $1,000 withdrawal and the $2,500 option,” says Gilmore.

“When we asked them to choose between the two or to express a preference for one of those options, most preferred the $2,500 option,” he says. “Based on that, our recommendation to employers and retirement plan providers who are committed to meeting the needs of diverse employees, particularly those who are earning low and moderate income[s], is they should consider adding the $2,500 PLESA.”

SECURE 2.0 established PLESAs, which are linked to a sponsor’s retirement plan, to allow employees to save up to $2,500 via after-tax contributions annually and withdraw from it at least as frequently as monthly without penalties; and also permits plan participants to withdraw up to $1,000 per year from their retirement account to pay for an emergency expense.

Respondents favored the PLESA option because of ease of access was preferable, the research found.

Preference for the emergency withdrawal option suffered as the setup for the PLESA “was preferable [to] having [emergency savings] side by side to retirement savings [and participant’s] concern about just not wanting to pull out [money from] a retirement account, which is essentially what the $1,000 withdrawal is allowing for,” adds Gilmore.

Additional takeaways included:

• Should sponsors add the $2,500 PLESA, a default contribution rate of 3% is acceptable for employees earning low and moderate incomes; and
• Although participants did not anticipate withdrawing from the account frequently, they prefer minimal restrictions on withdrawals and access to funds through direct deposit.

Commonwealth also wanted to know what employees’ comfort level with automatic enrollment in a PLESA would be.

Another takeaway is “employers really need to be thoughtful and clear about how they communicate [auto-enrollment into the PLESA] to minimize any concerns,” adds Gilmore.

“Employees might initially have some concern with automatic enrollment if they don’t fully understand it,” he says. “But once they understand that this is an account where they can withdraw funds, where they can opt out of being automatically enrolled then they feel comfortable with it, but thoughtful upfront communication is important.”

Commonwealth conducted focus groups in July and August of 2023 with 20 workers earning low- and moderate incomes.

Regarding the limited sample size in the research, “this is an important indicator of preferences of people, earning low- and moderate-income but should not be considered definitive,” says Gilmore.

Whether the findings can broaden or be applied widely will require additional research, he adds 

“We would encourage employers if they think, ‘well, I need a larger sample size,’ that’s very reasonable and we would encourage them to ask their employees—whether through focus groups or surveys, some opportunity to get these two options in front of employees—and get their preferences,” says Gilmore. “That’s going to be an even more robust indicator of what might work for a specific company and a specific company’s employees.”