Photo by Elien Dumon on Unsplash
With seven out of ten Americans not being able to build a good financial safety cushion, many finance experts are sounding the alarm, fearing a possibility of an emergency-savings collapse. Statistically, almost 70% of Americans have difficulty saving the modest $1,000. Meanwhile, the percentage of those who had to tap into their emergency savings at least once over the past year is approaching 50%. Many even have to tap into their 401(k) retirement accounts.
This puts a great deal of strain on employees, which makes things even worse, as it robs them of all motivation and energy to work. Happily, employers in the USA are increasingly aware of the problem and are taking steps to solve it. This fact is recognized by many experts. Not infrequently, employees simply have no choice but to tap into their 401(k) plans, as many of them use different types of loans, including extortionate payday loans. This puts their retirement in dire straits and poses a threat of financial devastation. According to statistics, about 29% of employees have tapped into their retirement plans to cover emergency expenses.
To ease employees’ financial lives, employers come up with emergency-saving plans and implement them to create an extra opportunity for their workers. Surveys have shown employees’ readiness to join these plans, as three in four say they’d agree to go for it.
However, there is no universal mechanism of implementation for this initiative, because there are administrative, legal and financial hindrances. Most likely, each employer would have to develop and implement an individual pattern, because enterprises’ budgets and accounting schemes vary greatly. Some of them are offering so called sidecar, do-it-yourself and ‘cookie jar’ plans. The former is attached to the 401(k) retirement program.
Some corporations have chosen to rely on sidecar accounts. They are made up of after-tax money accrued to them as an employer continues to work. As the balance reaches what an employee can define as his/her comfort level, he/she can arrange for deductions and save them as part of his/her emergency savings. An individual can monitor the account’s level and rebuild it in case it falls below the comfort level due to withdrawals.
One reason why such accounts are funded by after-tax money is the ERISA act of 1974, which prohibits pretax funding of such accounts. Companies use this strategy just to avoid breaches of the law. Auto-enrollment is not allowed either. It should be noted that the D. Trump administration is moving an act, which should correct the inconveniences.
There are companies (mostly smaller ones), who have chosen a simpler and less expensive way of helping their employees save money. The pattern implies that an employee starts an account at a bank, and the company contributes the same or smaller sums on a regular basis. Employees may arrange with their employers for auto-depositing or, based on their income, discuss individual transfers to their emergency-savings accounts with banking institutions.
This is a kind of pilot project involving companies headquartered in Wisconsin and Iowa. It implies that an employer contributes $3 per employee on a monthly basis. SafetyNet, which is enrolled in the project, rounds up employees’ debit card dollar purchases and directs the change into an employee’s “cookie jar”, thus helping him/her build an emergency-savings account. Employers can also make matching contributions.