As Congress considers recently proposed legislation aiming to make it easier for employers to enroll employees in payroll deduction emergency savings accounts, Prudential Retirement has introduced an after-tax supplemental savings feature meant to help employees build emergency savings.
Prudential worked with the Washington, D.C., nonprofit organization Prosperity Now to design a potential solution using payroll deductions to fund after-tax contributions. Prudential Retirement is now offering this feature to plan sponsors as part of their holistic workplace financial wellness package. According to the firm, the solution uses after-tax employee contributions to an existing retirement plan to build savings that can be accessed to cover emergencies.
“A small additional contribution each pay period may help build a financial cushion and reduce the effects of 401(k) plan withdrawals and loans that may cut into employees’ retirement savings and increase workforce costs for employers,” says Phil Waldeck, president of Prudential Retirement. “For employees that never need to use it, the money eventually adds to their long-term retirement savings.”
Prudential’s move comes at the same time that four U.S. senators proposed bills calling for increased access to various types of workplace savings accounts. Specifically, these series of bills would allow for pooled employer plans (PEPs); encourage employers to adopt automatic enrollment; automatically register workers in emergency savings accounts (otherwise referred to as “sidecar accounts”); and allow participants to automatically save tax refunds.
According to a Prudential white paper, “Increasing Financial Security with Workplace Emergency Savings,” 63% of participants state that they do not have the means to pay for a $500 emergency. All too often, participants are tapping into their tax advantaged retirement savings accounts to meet short-term needs, which in turn, sacrifices long-term financial goals. According to the survey, the millions of people with outstanding retirement plan loans are spending some $9 billion annually on loan fees alone. Overall, Prudential reports, 1.5% of 401(k)/individual retirement account assets are leaked out each year, reducing retirement wealth dramatically.