Sidecar Savings Accounts Create Current and Future Financial Security

Many companies already invest significantly in worker retirement benefits. But research has shown that, for a large percentage of lower- and moderate-income employees across America—people who often need their employers’ investment the most—to save for retirement perhaps misses the point. Even the most well-intended program doesn’t solve for an issue that many employees face: saving for day-to-day expenses. And without that building block in place, how can we expect them to save for retirement?

According to the Bureau of Labor Statistics, among private-industry workers, 66% had access to a retirement plan in 2017, and for many in that lower- and moderate-income group, saving for retirement takes a back seat to the pervasive, everyday worry about how they will pay their bills or handle a minor emergency. As we consider how to make retirement plans work best for employees, it’s worth examining how we might meet them where they are and ensure that the investments we make in benefits are relevant to them and improve employers’ business value.

Much has been written about Federal Reserve data reporting that over 40% of Americans couldn’t handle a $400 emergency from their own savings, but what are the implications of such a sobering statistic for the families of your employees? At Commonwealth, our “Rise With the Raise” research has shed some light on this: Having even modest savings directly correlates with employees being less anxious. From a national sample of approximately 1,300 employees, those with at least $400 in savings reported fewer financial concerns than those with less than $400. They also tended to worry the least about everyday expenses and were more likely to allocate raises to short- and long-term savings.

It may seem odd in this age of financial innovation, but tens of millions of Americans still lack access to a high-quality, affordable and engaging liquid savings tool, a simple financial “flywheel” to help them manage ever-increasing financial volatility. As a result, many turn to the most costly solutions to get through a month or a week—short-term borrowing (credit cards, payday loans) or tapping family and friends. Others draw on retirement savings, either by loan or withdrawal, to meet short-term needs.

But it doesn’t have to be this way.

Over Commonwealth’s nearly two decades of work, we’ve consistently found that people value and want to save; the challenge for employers is to make saving simple, engaging and rewarding. Despite a smorgasbord of financial products, it’s surprisingly difficult to find a safe, easy tool to store small amounts of cash, easily retrieved when a need arises. Therein lies the problem—and an opportunity for forward-looking employers.

Our research shows that employees welcome the idea of employer-sponsored savings interventions, with 74% saying that savings tools offered by their employer at the time of a raise, presumably to bank some of their increased income, would reduce their financial stress.

And even more encouraging, some interventions that work for employees are neither complicated nor expensive. Employees reported that simple, inexpensive strategies such as increasing their access to savings accounts or providing the option to automatically split a paycheck between checking and savings would make them more confident about their finances.

A promising path to this goal is to add “sidecars” to 401(k) plans. These enable the plan sponsors to add to or improve their liquid savings offering so workers have a buffer to draw on when needed—before dipping into pretax, long-term retirement investments. These efforts deserve more investment from the industry and support from policymakers, with targeted regulatory changes. Tapping the behavioral principle of “opt out” has been incredibly powerful for retirement savings; imagine if employers defaulted workers into a modest liquid savings tool, as well?

For those earning less income, their savings doesn’t need to be huge to make a large difference. Financial volatility often occurs in relatively tight margins, and even a few hundred dollars cash on hand begins to reverse the toxic stress people experience when they feel completely vulnerable to financial emergencies.

A growing body of academic research—as well as simple common sense—suggests that a less stressed employee is more focused and productive. We expect more from today’s worker—more adaptability, more cooperation, better engagement with customers—all of which require concentration and commitment and are most difficult when employees are distracted by chronic stress. Reducing worker financial anxiety is one of those rare employer time, energy and financial investments that is both the right thing to do and a source of business value.

Recognizing the business value of addressing employees’ financial security isn’t a new concept—retirement savings is a perfect example and one that is far more complex and expensive than employer-sponsored emergency savings interventions. But as employers with hourly or lower-income workers know, often a baseline of financial stability is a precondition for saving—and thinking—longer term. It may be that rounding out one’s workplace savings offerings to include liquid and long-term saving tools is the key to both addressing near-term anxiety and, ultimately, a long-term retirement security.

For corporate America, helping workers become more financially secure builds on a role many firms already play and presents a powerful opportunity to reduce toxic worker financial anxiety. In so doing, it can unlock stronger employee productivity and performance. Productive, confident workers and higher performing firms can only generate a stronger economy and healthier communities.

Timothy Flacke is executive director of Commonwealth, “a mission-driven organization that builds solutions to make people financially secure.” Before Commonwealth, Flacke worked as an independent consultant and author in the field of financial empowerment and asset development. He holds a master’s in public policy from the Kennedy School of Government at Harvard University and a Bachelor of Arts in philosophy from Boston College.