Workers’ Emergency Savings Shortage Showing in Shaky Retirement Security

Americans’ lack of savings to cover unexpected expenses is not a new issue,­ but economic events—inflation and market volatility—have shined a brighter spotlight on the stress on people’s finances. One sign of that stress is that the percentage of plan participants taking an early withdrawal from a retirement plan has increased over the past five years, according to analysis of transactions by Fidelity Investments.

More than three times as many participants took a hardship withdrawal in 2023 than did in 2018, Fidelity noted in a recent publication for employers. Hardship withdrawals increased to 6.9% in 2023 from 2.1% five years ago; in-service distributions increased to 10.2% this year from 9.2.% in 2018; and plan loans increased to 5.7% in 2023 from 4.4% in 2020—a five-year low—although slightly down from 6.5% in 2018.

That 2023 in-service distributions and plan loans are also higher than those taken in 2020 is noteworthy, at least in part, because such activity was higher that year as the COVID-19 pandemic-era CARES Act permitted penalty-free distributions. Hardship withdrawals were significantly higher in 2020, however, at 15.1%.

Importance of Emergency Savings

Other than preparing for retirement, emergency savings ranks as participants’ top saving goal, according to recently published Fidelity data of active workplace plan participants from January 1, 2020, through August 31, 2023.

“In looking at data from similar checkups from previous years (2022 and 2021), emergency savings was ranked first behind retirement in each of those financial wellness checkups as well,” says Emily Kolle, vice president, Fidelity Goal Booster. “In terms of why it is so high now, Americans have long struggled to maintain emergency savings, but the economic and world events of the last several years—including inflation, market volatility, and individuals still recovering from the financial impacts of the pandemic—have exacerbated the issue. In today’s current economic climate, many individuals are struggling to even meet their everyday expenses, never mind putting money aside for emergencies.”

In another sign of financial stress, 57% of U.S adults could not afford a $1,000 emergency expense, according to a Bankrate LLC report published in January.

“Today’s economy has left many Americans living paycheck to paycheck, and the thought of setting aside money for the unexpected can feel daunting,” said Kevin Barry, president of Fidelity Investments’ workplace investing division, in a statement. “The good news is many employers are stepping up to support the financial wellness of their workforce with emergency savings benefits.”

Several large employer-sponsored retirement plans have recently implemented benefits to help their employees achieve short-term savings goals, including Delta Air Lines, Starbucks and Whole Foods Market. Following Delta’s January launch of an emergency savings benefit, the company enhanced the program in August to provide greater flexibility. Early results summarized by Delta show that airline employees enrolled in the emergency savings program have increased their 401(k) contributions.

Fidelity-Recommended Best Practices

Fidelity’s publication provided best practices to get employers involved, noting that the “secret” to get workers to save is to start with a goal.

For example, employee interest increases when employers offer an incentive. According to Fidelity, its research showed an incentive for emergency savings can increase adoption of the accounts by 10 to 20 times. Allowing funding of the accounts through payroll deductions can double funding, Fidelity reported.

Fidelity also suggested to employers several factors that can boost employees’ short-term and emergency savings:

• Providing easy access to emergency funds quickly;
• Offering the emergency savings benefit to all employees, not only those eligible for the retirement plan;
• Ensuring workers can take emergency savings with them if they quit or are terminated; and
• Assuring employees that information about their personal finances is private from the employer.

Data in the report came from internal Fidelity analysis and Employee Benefits Research Institute data.