If there’s one thing the coronavirus pandemic has taught us, it’s that you never know when a financial emergency might strike. That emergency could be one that’s personal to you, or it could be a global crisis, like a virus that shutters economies across the world.
As a general rule, it’s wise to have a good three to six months’ worth of living expenses tucked away in a savings account. That way, if you lose your job or incur an unplanned bill, like a home repair, you’ll have money on hand for it. And you won’t have to risk landing in debt, getting foreclosed on, being evicted, or dealing with a host of other unsavory consequences.
Furthermore, if you don’t have money ready for emergencies, you may have to resort to dipping into your retirement savings when the need for cash arises. And that’s not ideal, because if you raid your nest egg ahead of your senior years, it won’t be there for you when you need it.
For years, financial experts have urged the public to build emergency savings. And now, some lawmakers are calling for companies to step up and assist employees with their emergency funds.
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Calling on employers to help
During a recent Senate hearing on retirement security, some lawmakers brought up the fact that workers commonly withdraw from their IRAs and 401(k)s to cover emergencies in the absence of having money in the bank for that purpose. And now, they’re pushing for employers to step up and help — namely, by extending the automatic enrollment feature for workplace retirement plans 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 on board with the idea of employer-assisted emergency savings, but Fidelity Investments is among the major firms encouraging the adoption of these programs — namely, to prevent premature retirement plan withdrawals. Last year, 1.6 million Fidelity customers took early distributions from their retirement accounts to cope with the pandemic. Normally, early withdrawals result in a penalty. Last year, those penalties were waived under the CARES Act. But either way, the result is the same — a lot of people now have less money on hand for their senior 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. What’s funny is that the option already does exist — it’s called an automatic transfer. Many banks allow account holders to arrange for a portion of each paycheck to land in savings automatically.
So why involve employers? For one thing, companies may be willing to offer incentives that get people to ramp up their savings, similar to the matches they commonly make to 401(k) plans. Also, employers may be able to couple these savings programs with financial literacy offerings that help workers get a better handle on their money.
It’ll be interesting to see if this proposal gains traction and if employers do end up taking a more active role in helping workers save for the near term. But if that does happen, it could certainly help a lot more people attain financial security.
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