State individual retirement account programs are designed in part for low- to moderate-income workers to be able to access emergency savings without taxes or penalties.

Part of the reasoning for the setup is that lower-income workers, who may have more pressing liquidity needs, will contribute more to an IRA if they can access funds without penalty. But what if participants do not know or are not interested in using this emergency withdrawal advantage?

In survey results released Tuesday by the Center for Retirement Research at Boston College, researchers Siyan Liu and Laura Quinby found that only 10% of low- to moderate-income workers said they would, in an emergency, tap an auto-IRA for an unexpected expense of $400 if they could. That low rate, they theorized, could hinder overall retirement savings if participants fear they cannot access the account.

“Since participants are more satisfied when they believe they can access their accounts easily, educating workers about the program’s Roth structure might increase take-up and ultimately lead to more retirement savings,” the authors wrote.

There are currently 20 states with some type of program set to go into effect, with 12 open to employee contributions, according to the latest tracking by the Georgetown University Center for Retirement Initiatives. Those with auto-IRAs are set up as Roth contributions, in part to make emergency withdrawals easier—though the structure also has benefits such as making it easier for people to “dis-enroll” and, of course, brings in present-day taxes for the states offering the programs.

The use and uptake of these auto-IRA programs are still developing. Researchers Liu and Quinby noted that they conducted a survey, rather than using “real-world evidence,” because so few data points exist.

They asked respondents why they would not tap the hypothetical retirement account to cover an emergency expense. Among the options, 57% said they were using the account to save for retirement, 51% said they were worried about taxes and penalties, and 29% said it was too much hassle.

The authors also noted that for workers to see the auto-IRAs as serving the “secondary purpose as precautionary savings,” the communication and framing may matter. But, as they found, only to a certain extent.

Two Paths

To get a sense of how the hypothetical IRA accounts might be used, the pair commissioned a survey by NORC at the University of Chicago of 3,213 respondents with income less than $85,000, splitting them into two groups.

One group was told that, if a member withdrew $400 from their hypothetical account, they could incur taxes and penalties. This language, according to the researchers, is often front-loaded in several state auto-IRA programs. Even if the descriptions go on to note that participants can access their contributions tax-free, the setup could “lead them to overestimate the cost of withdrawing funds in an emergency and nudge them toward other, more costly coping strategies such as taking on high interest-rate debt,” the authors wrote.

The second group, in contrast, was given the same scenario, but without any language regarding penalties. Instead, the participants were told they could go online or call someone to access their savings at any time. A few state auto-IRA programs use this language, the researchers noted.

The researchers then asked both groups if they would use the accounts as “precautionary savings,” with similar results. Among the “taxes and penalties” group, 8% said they would use the accounts that way, not far off the “easy access” group’s 11%.

There was somewhat more heartening news when respondents were asked if an auto-IRA would improve their financial well-being. In this case, 48% of the “taxes and penalties” group said yes, compared with 60% of the “easy access” group.

“Describing auto-IRAs as easily accessible on program websites is probably not enough to change withdrawal behavior and divert participants from familiar forms of borrowing,” the authors concluded. “Nevertheless, compared to an alternative framing that cautions of potential tax consequences from withdrawals, the easy-access framing does improve workers’ enthusiasm for the program.”

Access First

Meanwhile, emergency savings programs may slowly start entering the private defined contribution plan space. The SECURE 2.0 Act of 2022 permits sponsors to create emergency savings accounts connected to retirement plans, with the balance permitted to go up to $2,500 while allowing penalty-free withdrawal.

Michael Conrath, chief retirement strategist at J.P. Morgan Asset Management, said its research, “Retirement by the Numbers,” showed similar results to the Boston College study, with 13% of plan participants borrowing. Among those borrowers, people took, on average, about 20% of their account balance. But those types of withdrawals, he notes, can have negative long-term consequences.

“It’s important to consider how this cash flow volatility can potentially interact with market returns,” Conrath says. “For example, taking a loan during a market dip and then having to pay it back at a market high goes against the golden rule of investing of buying low and selling high. This can have negative, long-term effects on a worker’s nest egg. Also consider that many participants stop making contributions while repaying loans, which means they could miss out on any company match and leave money on the table.”

Conrath stresses that it is access that is key for savers, which the state auto-IRA programs are providing.

“The most important point to consider is having the ability to put money into a workplace retirement plan,” he says. “Those who have access in the workplace are able to save exponentially more for retirement than those who have to save on their own. Put another way, access equals savings–and educating workers about the benefits is key to driving up those savings amounts and helping workers reach the retirement finish line.”

Correction: This story fixes an inaccurate attribution.