More than a year has passed since economists deemed a recession more likely than not in the USA, and it certainly seems that the ticking time bomb has been diffused. Inflation has slowed significantly, while the unemployment rate is near a five-decade low. Consumer spending is growing, corporate profits are strong, and the housing market is stabilizing.

While this is positive news, experts warn that we should not pop the champagne corks just yet. Inflation is still well above the Federal Reserve’s annual target of 2 percent, and there is no guarantee that measures taken to lower it will remain consequence-free.

Tightening monetary policies could still negatively impact wage growth and apply increased financial strains on hard-working families. A 2022 survey found that 62 percent of Americans are nervous that inflation will affect their retirement savings and/or when they will retire.

Given the uncertain economic landscape, the need for employees to have both 401(k) retirement plans and Emergency Savings Accounts (ESAs) becomes crucial. A 401(k) offers a long-term savings strategy, ensuring security in retirement, while ESAs act as a safety net during times of financial difficulty in the short term. Both accounts work together to give the holder a sense of financial well-being and preparedness for whatever the future may hold.

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Why offer 401(k) Retirement Accounts?

A 401(k) enables employees to save for retirement in tax-advantaged accounts. Contributions are deducted directly from their paychecks and are not subject to income tax at the time of deposit, lowering their taxable income for that year.

One of the key incentives of 401(k)s is employer-matched contributions. Many companies offer to match a portion of their employees’ contributions, effectively providing “free money” that accelerates retirement savings. Profit-sharing employers may also contribute a portion of business profits to employee retirement savings.

Consistent contributions are vital for maximizing the potential of a 401(k) account. By doing so, employees benefit from dollar-cost averaging, reducing the impact of market fluctuations and steadily building their retirement savings over time. Compounding in this way, combined with the tax benefits and employer matching, make these accounts an invaluable tool for financial security in later life.

Why offer Emergency Savings Accounts?

ESAs are designed to cover expenses or crises that may arise unexpectedly. Unlike retirement accounts, these funds are readily accessible, providing a cushion to address immediate financial needs without disrupting long-term savings plans. Individuals can dip into this pot to help with situations like medical emergencies, car repairs, or sudden job losses. Its presence offers peace of mind during times of economic instability, which could otherwise impact their work. Employees can also avoid alternative emergency options that can result in debt through inflated interest rates, like a payday loan or charging a credit card.

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If an individual was to withdraw funds from their 401(k) account during these times, they may face hefty early withdrawal penalties, incur additional taxes, and compromise the long-term growth potential of their retirement savings due to lost compounding interest. Moreover, tapping into their 401(k) during emergencies jeopardizes their future financial security, as the account is intended to support them during retirement when their ability to earn income diminishes.

A 2022 survey found that 22 percent of US workers borrowed from retirement savings in the past year, with 64 percent claiming it was their least expensive option. This illustrates why it is so crucial that employees maintain both a 401(k) and an ESA simultaneously. Furthermore, research from BlackRock’s Emergency Savings Initiative, with the Defined Contribution Institutional Investment Association Retirement Research Center (DCIAA RRC), found that, during the COVID-19 pandemic, low-income households with at least $1,000 in emergency savings were half as likely to withdraw from their workplace retirement savings account and 70 percent more likely to contribute to a defined contribution (DC) retirement plan.

Allocating financial resources between 401(k)s and ESAs

How much employees should set aside into their 401(k) accounts and ESAs is based on a myriad of factors, including age, how long they plan to continue working, household size, and current and future cost of living. However, starting as early as possible is key, as is regularly reviewing contributions to ensure they are set at a suitable rate.

A good place to start is to set the percentage contribution to the 401(k) to at least the percentage the company will match so employees can take full advantage of that benefit. The same goes for the ESA, but employers tend to match with a dollar amount rather than a percentage contribution.

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It is wise to have employee contributions automated so workers can build the accounts up over time without any input. This reduces the risk of individuals neglecting or forgetting to contribute regularly, which is a common pitfall when it comes to long-term savings. They can also take advantage of dollar-cost averaging, reducing the impact of market volatility and potentially maximizing returns over time. Early results indicate that creating an ESA through an employer does not impact the contribution to the employee’s retirement plan.

Help secure your employees’ finances – today and tomorrow

Offering your employees the opportunity to contribute to 401(k) accounts and ESAs allows them to feel complete financial security because the two complement each other uniquely. An ESA helps protect their 401(k) contributions as they will not need to withdraw from their retirement funds during an emergency, ensuring that it continues to grow throughout their employment. On the other hand, the 401(k) eliminates the need for employees to ever question if they should withdraw money from their ESA in an emergency, as they don’t need to store these funds for the future.

The SEIU California State Council is one example of an organization that set up ESAs for its employees to support their financial well-being. They selected SecureSave as their provider as it boasts a 56 percent employee participation rate on rollout. “SecureSave is a low-cost, really novel benefit,” said Steve Robinson Burmester, the Director of Finance for the Council. “I noticed that a lot of people were borrowing money against their 401(k), and SecureSave offered an excellent auxiliary plan.” The SecureSave ESAs clocked a 95 percent retention rate, thanks to employees appreciating the ability to access their funds immediately during unexpected emergencies.

If you would like to learn more about how your company could benefit from ESAs, contact the SecureSave team today.

The post Preparing for the future: Why your employees need both 401k accounts and emergency savings appeared first on TechHQ.

This week, esteemed economists and bond managers have warned that there is still potential for an economic downturn this year. Interest rates have been hiked up to over 5%, helping to combat inflation, but also pushing a decrease in consumer spending and making borrowing more costly.

Therefore, many employees likely feel some degree of financial stress. According to a survey by Northwestern Mutual, about three-quarters of American adults expect a recession to have a high or moderate impact on their finances in both the short and long term.

This pressure can take a toll on their ability to perform their best at work. It manifests as on-the-job mistakes or accidents, low morale, and diminished productivity, and can extend beyond the individual employee. When one team member is experiencing financial difficulties, co-workers may need to pick up their slack or assist with additional tasks, which can strain team dynamics and lead to resentment or burnout. Additionally, when employees are preoccupied with their personal financial challenges, they may have less energy and enthusiasm to contribute to collaborative projects, brainstorming sessions, or creative problem-solving initiatives.

But the most significant impacts of financial stress on an employee’s ability to work come during times of immediate financial crisis. These could be unexpected medical expenses, car repairs, or home emergencies, resulting in decreased concentration or even sudden absence. Without an emergency savings solution in place, these events may force them to take out a 401k or payday loan, work a second job, or get into credit card debt. In the long term, it can lead to delayed retirement and a diminished quality of life.

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It is an employer’s responsibility to support their employees during these challenging times and provide avenues for financial relief and assistance. However, many struggle to implement effective initiatives that yield tangible and measurable results.

One way of helping to keep your workforce secure during a financial emergency is to offer a workplace Emergency Savings Account (ESA). These are dedicated funds set aside specifically for unexpected expenses and act as a financial safety net. Individuals can dip into this pot to weather emergencies without resorting to high-interest loans, depleting retirement savings, or experiencing undue stress.

What’s more, providing your employees with an ESA demonstrates your commitment to their overall well-being and helps them build a strong foundation for financial resilience. Employers can offer incentives, like matching a portion of their ESA contribution with each paycheck they receive. They could also offer a sign-up bonus or provide an additional match when they reach a certain milestone.

The new SECURE 2.0 Act means that, from 2024, employers can offer their staff an ESA as part of their retirement plan. The employee could elect to have up to 3% of their pay automatically placed in their in-plan ESA and then be able to make at least four withdrawals a year which aren’t subject to fees. However, after-tax contributions to an in-plan ESA are capped at $2,500.

In-plan ESAs can also incur fees and additional work for the employer due to the necessary ERISA compliance and other support costs. They also require the company to offer a retirement savings plan in the first place, which can be challenging for those lacking the resources or expertise to establish and maintain such plans.

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Alternatively, out-of-plan ESAs are protected from early withdrawal penalties or tax implications. The majority of these accounts do not have caps on contributions, and all the money is available as soon as it is required. The provider will also ensure that they are compliant, shifting the responsibility away from the company’s HR and finance divisions. Employees have the added benefit of being able to easily withdraw their contributions even if they change employers. Most out-of-plan ESAs are insured by the Federal Deposit Insurance Corporation (FDIC) and, from certain providers, can even accrue interest.

One prominent provider of out-of-plan ESAs is SecureSave. The company boasts a simple step-by-step setup process and an easy-to-use platform for HR teams to manage ESAs.

SecureSave ESAs are accompanied by a mobile and web app that allows employees to quickly see how much they have saved and all their benefits, like employer contribution matching and incentive programs. This has resulted in an average participation rate of 56% in companies that have adopted the ESAs.

SecureSave says that the average user has $1,000 saved after one year and on average, 89% of all emergency funds stay in the account. This helps secure every employee’s financial well-being and fosters confidence in the workplace. It is the first financial wellness product that has shown it can cultivate consistent employee savings habits at a large scale.

To learn more about setting up ESAs for your employees, contact SecureSave today.

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