Recordkeepers Responding to Focus on Emergency Savings

Retirement plan sponsors have seen that employees need to be prepared for short-term shocks to their finances in order to have overall financial wellness and be comfortable putting money aside for retirement.

A study from national nonprofit Commonwealth, the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center and the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute shows retirement plan recordkeepers are also addressing the emergency savings crisis. A series of interviews with nine of the largest recordkeepers in the United States revealed eight of them either offer or are planning to offer an emergency savings product.

According to the study report, although recordkeepers’ primary objective is to support retirement savings, they are increasingly understanding that other aspects of a plan participant’s financial life are crucial to their ability to save for retirement. Commonwealth says its own research supports this conclusion, finding that plan participants who have not saved for emergencies are twice as likely to tap their workplace retirement savings.

Two recordkeepers emphasized that the offering of emergency savings products represents a shift in how recordkeepers see their role in ensuring financial security for their participants. One said it took the firm “more than a year” to be comfortable saying that emergency savings should come before retirement savings, but it realized building emergency savings was a way to ensure that the retirement plan is not a “revolving door” of loans and withdrawals, the report says.

Another interviewee pointed out that the retirement industry’s focus is broadening to consider more aspects of financial wellness, including emergency savings.

The study also included interviews with seven plan sponsors across a variety of industries that collectively employ approximately 870,000 employees. A plan sponsor with a majority of low- and moderate-income (LMI) employees said it wanted to support employees in building emergency savings so they could avoid taking out employer loans or charging more to their credit cards.

Recordkeepers’ primary goal in offering emergency savings solutions is to improve plan participants’ retirement readiness—more than half of recordkeepers interviewed named that goal, with several naming it as their top goal. However, meeting plan sponsor demand and remaining competitive as more recordkeepers offer emergency savings products were also listed as motivations for offering or exploring emergency savings solutions.

While the recordkeepers said the need to help employees build emergency savings was obvious, their answers to “What is emergency savings,” and how much should be saved differed.

The report recommends employees should start by saving for frequent expense shocks to build short-term financial stability and then for larger income shocks, which aligns with other industry research. “With this framing, plan participants who cannot afford to save for many months of expenses can focus on short-term savings, which they can tap and rebuild without worrying about dipping into a fund that is supposed to be left untouched, such as retirement savings,” the report says.

There also wasn’t a consensus about how emergency savings solutions should be offered. The majority of recordkeepers interviewed are leaning toward offering out-of-plan solutions, though several said they would offer both in-plan and out-of-plan solutions to meet plan participant and plan sponsor demand. Plan sponsors were split on their preference for in-plan vs. out-of-plan solutions.

The report suggests that whether they’re leveraging an existing product, partnering with a third party or building a new product in-house, recordkeepers should keep in mind plan sponsors’ key considerations, which were:

• acting as a fiduciary for their employees;
• employee engagement/utilization;
• cost implications; and
• limiting their total number of benefits vendors.

Of the seven plan sponsors interviewed, more than half plan to offer emergency savings in the near term, either through their recordkeeper or credit union.