ESAs Contribute to Financial Security
Having access to liquid assets is an important element in a family’s financial security. Unfortunately, many Americans are unprepared for even modest financial problems and relatively small, unexpected expenses can be a real hardship for them. The pandemic has underscored the importance of having a financial cushion in difficult times. In response, employers are introducing programs that encourage workers to set aside cash automatically through payroll deductions that are deposited into emergency savings accounts (ESAs). The primary benefits of ESAs include decreased DC plan leakage in the form of hardship withdraws — employees are not dipping into retirement savings for emergencies — and an improved ability to attract and retain employees.
What You Should Know
ESAs are funded in a manner similar to 401(k) contributions. With ESAs, however, the funds deducted from an employee’s paycheck are taxed as ordinary income and are available when the employee has an immediate financial need.
According to a survey by AARP:
- An employer match makes the vast majority of employees (87%) more likely to save.
- Most employees (60%) would prefer that the match be deposited into the emergency savings account rather than into a existing savings account.
- The ability to direct payroll contributions to an existing account makes half of employees more likely to participate.
- Employees are least willing to compromise on the ability to access their money immediately, start or stop contributing, keep the account if they leave their job, and maintain privacy.
Recordkeepers can help plan sponsors offer liquid emergency savings solutions either in-plan (plan participants make voluntary after-tax plan contributions to accounts within 401(k) plans) or out-of-plan (employees can direct a portion of their pay to emergency savings fund accounts at an outside financial institution).
For out-of-plan ESAs, policy guidance secured from the Consumer Finance Protection Bureau (CFPB) enables employers to overcome a longstanding federal rule that had acted as a barrier to implementing automatic enrollment in emergency savings programs. A template now makes it easier for employers to apply for approval from the CFPB to add an Autosave program that is similar to auto-enrollment for DC accounts.
Providers can help plan sponsors educate employees on the importance of establishing emergency savings by offering resources like targeted educational materials and live seminars.
Employers considering ESAs should asses:
- If the ESA is to be offered in-plan or out-of-plan.
- Whether they want to set the ESA up to work through auto-enrollment.
- If employer contributions will be included and, if so, will they continue after an ESA reaches a certain threshold.
- Whether contributions may spill over into other types of contributions or investment vehicles after accounts reach a certain savings level.
- The possible impact of ESAs on existing DC plan accounts.
- The capabilities of a vendor to meet operational needs.
Employee Savings Account Vendors
*PNC does not endorse third party vendors. Information about third party vendors is provided for informational purposes only. Such information is not guaranteed to be accurate or complete.
|Commonwealth / Voya Financial (in-plan)||
Prudential / Prosperity Now (in-plan)
|MassMutual / Millennium Trust (out-of-plan)||
|John Hancock / Fintech App (out-of-plan)||