Benefits February 18, 2021

Why Retirement and Emergency Savings Need to Go Hand in Hand

Nearly 30% of workers have no emergency savings fund, leading many to raid their retirement accounts.

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Plan sponsors need to make sure workers keep both retirement savings and emergency savings as top-of-mind goals in order to prevent those without emergency savings from withdrawing money from their retirement accounts, experts say.

The importance of having emergency savings has been underscored since the outbreak of the COVID-19 pandemic, which caused many American workers to be laid off or have their pay reduced through scaled-back hours. In addition, LIMRA’s Secure Retirement Institute (SRI) found in a survey conducted last July that 29% of workers lacked an emergency savings fund, and even among those who had one, 59% said they would exhaust their savings before six months had passed.

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Pete Welsh, head of retirement services for Millennium Trust, notes that before individuals can address their long-term financial goals, they need to address their short-term financial goals, including emergency savings, which is why emergency and retirement savings need to go hand in hand.

Yanela Frias, president of Prudential Retirement, says a survey her company conducted prior to the COVID-19 outbreak found that 63% of Americans did not have even $500 stored away for an emergency. As a result, Frias says, “Many have taken loans, hardship withdrawals or COVID-19-related distributions from their retirement plans, compounding the degradation of their retirement savings and causing many employers to worry if their workers will be able to retire on time. COVID-19 has highlighted the shortcomings of the current approach, whereby employers do not address emergency savings. During the first three quarters of this year, 10% of plan participants took a loan, hardship withdrawal or COVID-19-related loan from their retirement account. We know that emergency savings is a very important concept because, often, the retirement plan is the only source of savings Americans have. When they withdraw money from their retirement account, it directly impacts their ability to retire, and the money may never be replaced. An in-plan emergency savings account can be a source of liquidity when an individual faces a crisis, preventing them from taking money out of their retirement account.”

After the pandemic erupted, Prudential Retirement surveyed plan sponsors about emergency savings accounts and found that 23% of those that don’t already offer one intend to include automatic emergency savings as one of their benefits, Frias says.

Alison Salka, senior vice president and head of research at LIMRA, says a survey her organization conducted among plan sponsors showed that 70% are concerned how COVID-19 has weakened the retirement readiness of their workers.

“Consumers need to be able to deal with short-term, unexpected emergencies as well as long-term goals, most notably, retirement,” she says. “A good savings mindset prioritizes the creation of a safety net of funds and then a series of other goals that lead to long-term financial security. Payroll deduction is a great and easy way to help people save. Emergency savings accounts at the workplace are particularly important, given the economic fallout from the pandemic. Since the pandemic began, 14% of consumers we surveyed lost their job. In addition, 32% earned less income due to decreased hours or reduced pay. Forty-five percent of workers indicate the pandemic’s economic downturn has negatively affected their retirement. If employees have emergency savings in place, then they can avoid raiding their retirement accounts.”

Data and Research February 17, 2021

The Pandemic Hasn’t Affected Retirement Savings Overall

Some Americans report having difficulty saving for retirement during the pandemic, but researchers found 401(k) contributions remained steady and mass withdrawals did not occur.

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The economic impact of the COVID-19 pandemic has put current financial wellness and future retirement dreams at risk for many Americans, according to LIMRA Secure Retirement Institute (SRI) research—especially for those who lost their jobs or a portion of their income.

The pandemic has taken a toll on retirement confidence and reversed a trend of increasing confidence going back to 2013, the research finds. Less than half (49%) of survey respondents feel confident they will be able to have the retirement lifestyle they desire, down 6 percentage points from just a year ago. For the four in 10 (39%) respondents who have lost a job or income since the outbreak of COVID-19, retirement confidence dropped to 42%, down almost one-quarter from a year ago.

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SRI also asked employees about their retirement savings and participation in workplace retirement savings plans. When it comes to access and participation in a defined contribution (DC) plan, non-disrupted employees fared much better than those who experienced job loss or a loss of income. Out of all employees, 64% are currently contributing to a plan. Seventy-one percent of non-disrupted employees are currently contributing, but only 54% of disrupted employees manage to contribute to a retirement plan.

When asked about the impact the COVID-19 outbreak has had on their ability to save for retirement, 44% of employees found the impact to be “somewhat” or “significantly” negative. Among employees experiencing a job disruption, nearly seven out of 10 (69%) say their ability to save has been negatively impacted. Only 28% of non-disrupted employees report a negative impact.

However, an Issue Brief, “COVID-19 Is Not a Retirement Story,” published by the Center for Retirement Research (CRR) at Boston College, says the COVID-19-induced recession appears to have had little impact on retirement overall. Researchers note that Social Security monthly payments have continued with an early retirement age of 62, and the program has served as a safety net for older employees who were forced to leave the labor market. “Thus, Social Security has provided a steady source of support during the pandemic,” they write.

In addition, employee and employer 401(k) contributions remained relatively steady, and while unemployment increased, that didn’t hurt older employees more than other groups.

The researchers point out that although the stock market experienced major losses last March, it roared back during the rest of the year. And 401(k) balances were not affected by mass withdrawals expected to occur after passage of the Coronavirus Aid, Relief and Economic Security (CARES) Act, which allowed for coronavirus-related distributions (CRDs) and increased participant loan amounts. The researchers found that among plans offering CRDs, only 7% reported that more than 5% of participants used this option. In terms of loans and withdrawals generally, 25% to 35% of plans saw some increase in activity.

In addition, the CRR research found only 5% of employers suspended or reduced their contributions to 401(k) plans.

Looking at unemployment data, the researchers came to the unsettling conclusion that the reason the pandemic has had little effect on retirement is that “people who have the least have borne the brunt of it.”

“But the lack of impact from COVID-19 does not mean that our retirement system is in good shape,” the researchers note. “The problems confronting the retirement system before the pandemic remain. Social Security continues to face a 75-year deficit and the depletion of the trust fund in the mid-2030s. Employer plans continue to face problems of inadequate balances, a major coverage gap, no decumulation mechanism and low interest rates. And older workers continue to face difficulties in finding new jobs.”

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