The Future of Emergency Savings Post-COVID

It took a catastrophic global event to demonstrate how ill-prepared many Americans are for even a brief interruption of income—including many people high up on the income scale.

The Defined Contribution Institutional Investment Association (DCIIA), the SPARK [Society of Professional Asset Managers and Recordkeepers] Institute, the Plan Sponsor University and the Retirement Advisor University on Friday held a timely webinar on the future of emergency savings.

Speakers included Tim Flacke, executive director of Commonwealth; David John, senior strategic policy adviser for AARP; and Christine Lange, head of retirement business management and customer solutions at Prudential Financial.

The trio described the economic devastation that has been wrought in the United States by the coronavirus pandemic, describing in stark terms the massive jump in unemployment that has already occurred. Yet they also voiced hope that this dire situation will lead to a fundamental rethinking of the way working Americans spend and save.

“The financial well-being of many Americans is not as strong as it appears to be or as it should be, and that fact has been made very clear in the last two months,” Flacke said. “We have literally seen miles-long lines of people waiting to get food. What is really eye-opening is that, when you look closely at the news coverage, you will see a lot of quite nice and new-looking cars in those lines. What that demonstrates is that the majority of Americans, whatever their income level, had been living very much in the present in terms of their finances.”

The panel noted that a similar phenomenon was observed during the federal government shutdown back in January 2019, but, at the time, the widespread nature of the situation was not fully appreciated.

“Many of those people who were furloughed by the federal government were well paid, but even for them, one or two missed paychecks became an economic disaster,” Flacke observed. “We have all seen the research showing as many as three in four Americans are living paycheck to paycheck. One Willis Towers Watson survey puts the figure at 40%, but that’s just for people working with the largest and most successful U.S. employers.”

Changing this situation will take years of concerted effort, the panel members agreed, but the job should be made at least a bit easier now that the coronavirus pandemic has cast so much light on the United States’ financial weak points. The group proposed that the retirement plan services industry can be the fulcrum for change, because getting people to commit to emergency savings will take many of the same strategies and solutions as it takes to get them to start saving seriously for retirement.

“One clear lesson we can bring to the table from the retirement planning perspective is that people should be encouraged to start small and to automate their savings—and we can’t make them feel daunted by saying they need to have six months’ expenses saved in cash in their bank,” Flacke said.

John noted that AARP has conducted research into three different emergency savings models—all of which can be very effective but which will also require regulatory changes and a commitment from employers and financial services providers. The first two are variations of creating after-tax savings sub accounts within existing retirement plans. The third is to use separate, parallel savings accounts at a bank or credit union while relying on payroll deferrals to automatically fund the account.

“All three models are focused on the ability to use automatic enrollment and regular, if small, contributions,” John said. “Again, one thing we don’t want to do is to structure the savings goals in a way that discourages people from participating. We want people to feel good about saving relatively small amounts in each paycheck. Unfortunately, we have found that there are regulatory complications for all three of these models at the moment. The current automatic enrollment safe harbors meant for retirement plans aren’t sufficient, and so we need to update these regulations to make emergency savings easier, simpler and cheaper. For regulators, it should not take a lot of work to do these updates, we believe.”

Lange echoed that point and said the retirement plan services industry is eager to provide emergency savings solutions, adding that plan sponsor clients are always hesitant to adopt solutions or strategies that have not been explicitly approved by regulators.

“For many workers, and not just those lower on the income scale, life is a regular string of financial stresses and emergencies,” she said. “Understanding that will help us create a better solution. Before we can prepare people for another pandemic, we need to start by helping people prepare for the episodic challenges that emerge in normal life—the flat tire, the hole in the roof, a week without pay. To do this, we can and should use the retirement plan industry’s infrastructure. It’s a very powerful system, and we need to take advantage of it.”