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For many Americans it has always been a struggle to keep enough savings for retirement.
One reason workers tend to fall short: They often immerse themselves in the money they set aside for their golden years.
Now some experts and lawmakers are discussing an idea that could help workers avoid this – by allowing employers to offer emergency savings plans.
The programs would function similarly to the retirement programs already offered by many employers, allowing employees to save for unforeseen events in addition to long-term funds for their later years.
The idea emerged recently at a Senate hearing on old-age pensions. The discussion painted a bleak picture of where some Americans are in terms of preparing for retirement.
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“We had a retirement crisis prior to Covid-19,” said Senator Patty Murray, D-Wash. “But like so many other things, this pandemic just poured gasoline on the fire.”
“If we are to rebuild our country stronger and more equitable, we have to face the reality that the way we help families plan for the future has been stuck in the past for far too long,” she said.
There are complex reasons why Americans have had such great problems putting money away for the future.
Many employees do not have access to pension plans through their employers. Even those who do so can find it difficult to put money aside to use for other more immediate needs.
Studies also show that Americans routinely struggle to find enough money to deal with unexpected expenses.
In fact, 40% of Americans are struggling to meet the $ 400 cost, according to a 2018 Federal Reserve report. A recent Bankrate.com survey published in January found that fewer than 4 in 10 people could pay an expense of $ 1,000 from savings.
“Unfortunately, an alarming proportion of Americans have very little or no emergency savings,” Shai Akabas, director of economic policy at the Bipartisan Policy Center, said during his testimony in the Senate.
One way to resolve this would be to extend the auto-enrollment features now offered for company retirement plans to emergency savings, Akabas said. This would allow employers to include their employees on a plan that would automatically set aside a portion of their paychecks for routine savings.
Efforts to address this issue are well underway, including a $ 50 million emergency savings initiative launched by BlackRock in 2019. However, there are challenges in getting such plans off the ground, such as low participation and regulatory barriers, Akabas said.
Providing clarity on regulations and adequate consumer protection open the door to this promising tool and thus to better savings results.
Director of Economic Policy at the Bipartisan Policy Center
“Unfortunately, the law is unclear for employers who want to automatically register for these accounts,” Akabas said. “Providing clarity on regulations and adequate consumer protection will open the door to this promising tool and thereby achieve better savings results.”
A bill to help employers experiment with offering such accounts is expected to be reintroduced this year, Akabas said. This bipartisan proposal was made by Sens. Cory Booker, DN.J .; Todd Young, R-Ind .; and Tom Cotton, R-Ark., at last Congress.
Fidelity Investments is among the companies promoting the introduction of such programs to help workers avoid early withdrawals from their retirement assets, said Dave Gray, director of retirement products at the company, during the Senate hearing.
Last year, 1.6 million Fidelity customers received distributions from their retirement accounts under the CARES Act following the outbreak of the Covid-19 pandemic.
“The significant number of withdrawals shows that there is a need for emergency savings,” said Gray.
Legislation could help develop emergency savings programs that participants can use to earn a contribution to their retirement plan by contributing to an emergency savings account, he said.
Until then, experts recommend individuals and families to keep savings so they can deal with unforeseen expenses when they arise.
“It’s generally not possible without having forced savings in a separate account,” said certified financial planner Ted Jenkin, CEO of Oxygen Financial in Atlanta.
Workers should generally strive to have at least three to six months of cash in a bank account separate from the account segregated for verification, either online or at a community bank, Jenkin said.