How Your Employer Can Help You Build Emergency Savings | Family Finance
It’s hardly news that Americans are woefully unprepared to handle a financial emergency. Study after study has shown that many families have meager cash reserves to fall back upon.
A 2018 report from the Federal Reserve System made headlines for finding that only 40% of Americans would be able to cover a $400 emergency expense. Two years later, a survey by Bankrate found, in somewhat more positive news, that 41% of people had enough savings to pay for a $1,000 emergency.
However, the COVID-19 pandemic has depleted many bank accounts, and LIMRA, a financial services industry group, reported in December 2020 that nearly a quarter of families have no emergency savings whatsoever.
While the studies – and the balance in your savings account – may be discouraging, there could be help coming from an unexpected place: your employer. One of the newest innovations available to workers today are emergency savings accounts, which are offered as a workplace benefit to make it easier to build a rainy-day fund.
Employers Look for Ways to Help Workers
The same LIMRA study that found almost 1 in 4 workers have no emergency savings also discovered that the majority of employers are interested in helping people change that. The organization’s research found that nearly two-thirds of companies are somewhat or very interested in providing workers access to emergency savings accounts.
That’s likely because financial stress can have a negative impact on employee productivity, says Denise Stefan, agency president for Engage PEO, an organization providing human resources solutions to small and midsize businesses. Helping workers weather financial storms may ultimately benefit the company as a whole.
“We’ve seen that health issues can compound,” says Sherry Olson, vice president of human resources for Wex, a payment solutions provider. Someone who can’t pay their bills may have higher levels of anxiety and stress. That could leave workers distracted on the job, or in the case of chronic stress, cause physical illnesses that result in missed work due to sick days.
“The pandemic has shown us how unpredictable life can be,” says Stoyan Kenderov, CTO for Plastiq, a business-to-business payments provider. However, it has also led to some creative thinking about how businesses can help workers, and at least one major company has launched an emergency savings initiative in recent months.
Emergency Savings Accounts: Seamless Savings Tool
Employer-sponsored emergency savings accounts are a relatively new phenomenon. They may go by a variety of names such as sidecar accounts or rainy-day accounts, but they all work in basically the same way. The accounts are set up through the workplace and allow automatic deposits of after-tax dollars from a paycheck to a savings account. Money in the account can be accessed at any time with a debit card or electronic transfer.
While workers could open their own savings account and directly deposit a portion of their paycheck, emergency savings accounts offer convenience. Plus, depending on how they are set up, they could work seamlessly with an existing 401(k) or other retirement account.
For instance, it may be possible to link an emergency savings account to a retirement fund. “When you reach a certain amount (in emergency savings), you can shift money to retirement,” Stefan says.
The Consumer Financial Protection Bureau made it easier for employers to set up emergency savings accounts when it issued a template that could be used to develop automatic savings programs. That template was released in July 2020, and in October 2020 UPS became the largest employer to launch an emergency savings initiative. Its program allows 90,000 nonunion workers to set aside after-tax dollars for emergency savings.
While UPS was the first major company to launch an emergency savings account program, some say it won’t be the last. “I expect these savings accounts to gain popularity down the line, as they also help build loyalty to the employer,” Kenderov says.
Other Workplace Options for Emergency Help
Until emergency savings accounts become more widespread, workers can turn to a variety of other financial security tools offered by employers.
“I think you’ll see employers getting more and more creative,” Olson says. Many firms are taking a holistic approach to benefits and rewards, and that includes finding ways to improve financial literacy and strengthen financial security.
For instance, some workplaces may provide online tools and apps that can make budgeting easier. Others may offer complimentary consultations with financial planners. Financial counseling is also available through some workplaces and can be helpful to those navigating an emergency.
Although not as common, emergency cash grants are also available from some businesses. Also known as employee hardship funds or employee relief funds, these may provide direct financial aid to workers with a critical need, such as a car repair or rent payment. These programs may be set up so that employees receive a certain level of assistance from the fund and then pay it back over time using payroll deductions.