A growing share of U.S. adults believe they would struggle to afford an emergency expense, but a recent regulatory update may present an opportunity for employers to help.
An annual study published last month by financial services company Bankrate found that fewer than half of Americans would pay for an emergency expense of $1,000 or more from their personal savings, a figure that Bankrate said has remained steady since 2022. In September 2023, the company found that 81% of adults had not increased their emergency savings since the beginning of that year — and nearly one-third actually had less saved for emergencies.
“This has been a significant challenge for employers, especially over the last three to four years,” said Dave Amendola, senior director, retirement at WTW.
Employers have taken several approaches to address financial resilience. In one recent example, Amazon announced last July the creation of a savings program that allows employees to automatically set aside a portion of their paychecks toward an emergency fund. Other organizations have pivoted to solutions that offer more frequent access to earned wages, in addition to beefing up financial literacy programs.
Emergency savings products can offer useful features that traditional savings accounts — and other common products of financial institutions — do not necessarily have, said Nick Maynard, senior VP at financial nonprofit Commonwealth.
For instance, savings accounts often require minimum contributions and may place limits on how frequently account holders can take money out — elements that may be absent from workplace savings products. Such products may also offer an automation component that directly places funds from employees’ paychecks into a savings account, rather than requiring them to manually move money from a checking account to their savings accounts.
“All of that is friction,” Maynard said. “Employers can look at their current set of vendors and partners and see who is tackling this challenge.”
What to watch for in 2024: PLESAs
A new option is on the horizon, thanks to guidance published in January by federal regulators on the implementation of pension-linked emergency savings accounts, or PLESAs.
PLESAs are short-term savings accounts that can be maintained as part of a retirement savings plan, such as a 401(k) plan, according to a U.S. Department of Labor press release. They were established as part of the SECURE 2.0 Act, a component of the 2023 Consolidated Appropriations Act enacted in late 2022.
Only employees who are not highly compensated may participate in a PLESA, according to the joint IRS, U.S. Department of the Treasury and DOL guidance. Employers can set lifetime contribution limits of up to $2,500, automatically enroll employees in PLESAs and make matching employer contributions to linked retirement plans.
Additionally, employees with a PLESA can withdraw their funds without penalty, a key differentiator of the plans from typical retirement savings accounts. That feature might especially appeal to employers and employees given research findings showing increased 401(k) hardship withdrawals in recent years.
Though the law took effect on Jan. 1, many employers and retirement plans sought more regulatory clarity rather than implement PLESAs right away, Amendola said. The federal guidance document “does go a pretty significant way in clarifying how this provision would work,” he added, but does not address every concern. Specifically, plan recordkeepers may need more time to develop administrative structures that support PLESAs.
“I think employers are going to look at [PLESAs] strongly, and we may start to see implementation in 2025,” Amendola said. “This could be a really good tool, but there’s a lot that needs to be done.”