A report from the Defined Contribution Institutional Investment Association provides insight into the progress the retirement industry has made in developing and implementing emergency savings solutions.
He notes that while emergency savings solutions may vary in their exact approach, it’s clear that adequate emergency funds are an important part of financial well-being and financial security. The solutions currently in place and those being created are guided by two key ideas, the report adds. The first idea says that emergency savings should be its own “bucket,” meaning funds are placed in a separate account from funds intended for long-term retirement savings. The second idea indicates that well-designed emergency savings accounts are effective buffers against early retirement savings withdrawals.
“Ideally, public policy will support the future evolution of emergency savings solutions by providing clarity to plan sponsors, archivists and other providers on important guidelines and best practices,” the DCIIA said. “An important development would be to explicitly allow automatic enrollment in emergency savings vehicles.”
The report found that the general consensus is that emergency savings solutions should enable short-term savings with cash and preserve long-term savings. Most of the solutions highlighted in the report offer a dedicated account separate from retirement savings that is either outside the pension plan as a stand-alone account or inside the plan but separate from the retirement assets of base.
The report further suggests that households who save in an account dedicated exclusively to emergency savings are more likely to have a higher amount of liquid savings than those who save but do not have a savings account. dedicated emergency. Throughout the pandemic, households with at least $1,000 in liquid emergency savings were half as likely to withdraw from their workplace retirement savings accounts.
“Legislation should support emergency savings solutions separate from retirement savings. Accounts should be flexible and allow people to save for the types of financial challenges they face,” the report says. “This is especially important for households headed by people of color, who were more likely to have lower incomes as the pandemic approached and see their incomes decline.”
Adding liquidity features into core retirement assets can carry risks for both the industry and the consumer, says DCIIA. The data suggests that hardship withdrawals are being used as a substitute for emergency savings, with almost half of those who have made such a withdrawal saying they have taken too much in hindsight.
Policymakers should ensure that emergency savings rules actually support the preservation of retirement funds by protecting retirement savings from leaks, the report suggests. Additionally, policymakers have a unique opportunity to improve retirement security and financial well-being by enabling greater access to emergency savings and supporting models that are already in the market, DCIIA concludes. .
The report urges policymakers to support emergency savings models that enable automatic enrollment, ensure emergency savings are their own savings bucket, and offer a wide range of options, especially for low to moderate income households.