Could employers start offering emergency savings programs? Some lawmakers are pushing for it
If there’s one thing the coronavirus pandemic has taught us, it’s that you never know when a financial emergency might strike. This emergency can be a situation that is unique to you, or it can be a global crisis, like a virus blocking economies around the world.
Generally, it is wise to have three to six months of living expenses in a savings account. That way, if you lose your job or incur an unexpected bill, like a home repair, you will have money on hand for it. And you won’t have to risk getting into debt, being foreclosed, being kicked out, or facing a host of other unpleasant consequences.
Plus, if you don’t have money for emergencies, you may need to dip into your retirement savings when the need arises. And that’s not ideal, because if you plunder your nest egg before your old age, it won’t be there for you when you need it.
For years, financial experts have urged the public to build up emergency savings. And now some lawmakers are calling on companies to step up and help employees with their emergency funds.
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Call for help from employers
In a recent Senate retirement security hearing, some lawmakers spoke about the fact that workers typically opt out of their IRAs and 401 (k) to cover emergencies when there is no money in the bank at that time. end. And now they’re pushing employers to step up and help – namely, expanding the automatic enrollment feature for workplace pensions to include emergency savings accounts. In fact, a bill to help employers roll out these programs is expected to be reintroduced this year. It was previously presented as a bipartisan proposal.
Not only are lawmakers embracing the idea of employer-funded emergency savings, Fidelity Investments is among the big companies pushing the adoption of such programs, especially to prevent premature withdrawals from pension plans. Last year, 1.6 million Fidelity customers drew early distributions from their retirement accounts to deal with the pandemic. Normally, early withdrawals result in a penalty. Last year, these sanctions were lifted under the CARES Act. But anyway, the result is the same – a lot of people now have less money on hand for their retirement years.
Workers today can sign up to have money deducted from their paychecks to land in a 401 (k) – and lawmakers want to see that option exist for savings accounts. The funny thing is, the option already exists – it’s called an automatic transfer. Many banks allow account holders to have a portion of each paycheck automatically be savings.
So why involve employers? On the one hand, companies may be willing to offer incentives that encourage people to increase their savings, similar to the matches they typically make with 401 (k) plans. Additionally, employers can combine these savings programs with financial literacy offerings that help workers manage their money better.
It will be interesting to see if this proposal gains traction and if employers end up taking a more active role in helping workers save in the short term. But if that happens, it could definitely help a lot more people achieve financial security.