Even amid the economic recovery from the pandemic, millions of US households struggle to attain short-term financial stability, a foundation for long-term security and well-being. A recent national survey conducted by the Bipartisan Policy Center (BPC) found that a broad swath of workers live paycheck to paycheck, with almost one-third of respondents saying they could cover roughly a month or less of expenses if they lost their income.
We know that addressing widespread financial insecurity requires a long-term, cross-sector approach. However, there are immediate steps policymakers can take to help create a stronger, more person-centered savings infrastructure that can build financial security, especially for people with low and moderate incomes (LMI). Specifically, policymakers can take action to make saving for emergencies as easy as possible by enabling auto-enrollment into multiple types of workplace-based savings accounts.
The research outlined below suggests this solution will benefit LMI households by building financial resilience and preserving retirement. Policies that allow for automatic enrollment in workplace savings also have broad support in the field. Earlier this year, the Aspen Institute Financial Security Program (Aspen FSP), BPC, Commonwealth, the AARP Public Policy Institute, and SaverLife published the Joint Principles for Effective Emergency Savings Policy for policymakers to “allow for automatic enrollment in workplace emergency savings” and to “allow for a wide range of options, particularly for LMI households.”
Emergency savings are critical for LMI households, but not everyone has access.
Short-term savings are a crucial part of financial stability for almost every household, especially for LMI households and households of color. Cash on hand is essential to cover financial shocks or to smooth consumption due to income volatility. Even a small amount of emergency savings can help low- and moderate-income families weather a drop in income. Households with as little as $250 in savings are less likely to be evicted, delay paying bills, or turn to high-cost credit alternatives, such as payday loans, after a significant income disruption compared to those who lack savings.
Short-term savings support retirement savings by helping people build and protect retirement assets. A survey conducted by Aspen FSP, DCIIA, Morningstar, and NORC at the University of Chicago found that emergency savings significantly reduced the likelihood of workers withdrawing from retirement funds during the economic crisis caused by the pandemic. In addition, recent research shows that—across the income spectrum—people with emergency savings are more likely to contribute to their retirement accounts and less likely to withdraw from them if they already have accumulated a balance.
Routinely positive cash flow is a foundational pillar for building financial security and a necessary prerequisite for building savings. However, even with routinely positive cash flow, not every household has access to the tools and processes, such as automatic enrollment, that make saving for emergencies as easy as possible. As a result, LMI households have significantly less in emergency savings than higher-income households. Recent research has also shown significant gaps in emergency savings by race and income, with 36% of Black and 28% of Hispanic workers reporting having no emergency savings, compared to 24% of white households.
Despite these disparities, research shows that LMI workers find value from savings tools in their employer-provided benefit plans and that they do save as long as savings tools are designed with their needs in mind. The ability to automatically save is especially important for emergency savings to be built, used, and rebuilt. In other words, rather than accumulating large amounts of savings, people use the accounts frequently as essential buffers. Having those savings is critical to financial stability.
To advance equity, we need to advance multiple pathways to automatic emergency savings.
Across all the tools people use to save for emergencies, evidence continues to show that automatic enrollment is key to helping people build savings and work toward short-term financial stability. For example, the NEST Retirement Savings system in the United Kingdom is conducting a trial ‘opt-out’ payroll savings program, and the results have been promising: uptake increased from 4 to 6% before the trial to 40% after using automatic enrollment. When automatic enrollment became a standard feature of 401(k) plans in the US, participation nearly doubled, with 93% of new hires contributing. It also dramatically increased participation among younger, lower-income, and female employees, suggesting it could have a similar effect on emergency savings.
Various types of workplace emergency savings accounts can currently be offered to workers, including accounts provided through a bank and those provided by a payroll card (“out-of-plan”), and accounts within the structure of a retirement savings plan (“in-plan”). Enabling automatic enrollment into as many accounts as possible is essential to reach the most workers possible, especially LMI workers. Supporting only one type of emergency savings account could also stifle innovation in the market, excluding key workers who desperately need emergency savings.
In-plan emergency savings can provide access to workers with retirement plans.
In-plan solutions are emergency savings accounts offered in conjunction with a retirement savings plan and could provide emergency savings access to millions of LMI workers. Even accounting for the gaps in coverage, tens of millions of LMI workers have access to retirement plans, and a disproportionate share of those people do not participate. For those with access, emergency savings can drive the uptake of retirement savings and make retirement saving more inclusive. In-plan emergency savings can also be used to integrate emergency and retirement savings, allowing funds to automatically roll over to retirement when emergency savings goals are met and restart when funds are withdrawn.
In addition, retirement savings leaders and policymakers have continued to create products and implement policies that increase access to workplace retirement savings. As state-facilitated retirement savings programs expand and federal proposals to expand access are considered, increasing numbers of LMI workers are likely to have access to workplace-based retirement savings over time.
In-plan solutions are already in the market: in 2020, Commonwealth and UPS/Voya collaborated to launch an in-plan emergency savings program. In its first year and a half, the solution has resulted in $10 million saved and shown that in-plan solutions can reach and be utilized by LMI workers.
Out-of-plan emergency savings products can be a flexible option for all workers.
Out-of-plan solutions through banks, credit unions, and payroll cards (separate from a retirement plan) can allow for flexibility and ease of access to many people, including those who do not have access to workplace retirement savings plans. Currently, 58% of workers in the bottom quarter of earners do not have access to a work-based defined contribution retirement plan. Developing out-of-plan solutions could more easily reach those workers.
Research also shows that LMI workers can save for short-term expenses using out-of-plan solutions, but enabling automatic enrollment into these accounts through an employer would make saving easier. For those who do not use savings tools, it could help bring millions of un- and under-banked people into the mainstream financial system.
There are several out-of-plan solutions in the market—including financial technology start-ups SecureSave and Sunny Day Fund—which offer savings accounts as a workplace benefit. Due to policy concerns, no solutions have been able to offer automatic enrollment to companies.
Policymakers can take action now.
Congress has started to act on the need for automatic enrollment into emergency savings. Legislation that would allow for in-plan auto-enrollment, introduced by Senators Young and Booker, was passed unanimously as part of the RISE & SHINE Act by the Senate Health, Education, Labor, and Pension Committee this year. Additionally, legislation that would allow for out-of-plan auto enrollment has been introduced in past Congresses. These proposals are consistent with the Aspen FSP’s policy brief outlining the variety of policy options available to ensure that automatic enrollment into workplace emergency savings will be available for everyone, including people with low or moderate incomes who struggle to maintain positive cash flow. Policymakers, as well as those in the private and nonprofit sectors, can address these barriers and make this option possible for LMI workers across multiple channels.
Policies that allow for automatic enrollment into workplace emergency savings are a critical step toward giving low- and moderate-income workers the tools they need to effectively save for emergencies. Given the variety of ways these workers can access workplace savings, policymakers should allow for as many automatic emergency savings options as possible. With the right solutions, vulnerable households will be better prepared for short-term financial shocks and begin building long-term financial security.