Communiqué

Why It’s Time for Emergency Fund 401(k)s

Posted on: Monday, December 19, 2016

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By Richard Eisenberg / Next Avenue

A lot has been written about America’s retirement crisis (some of it by Next Avenue). But I don’t think there’s been enough attention given to America’s emergency fund crisis. And I think it’s about time employers step up to help with this problem by offering the equivalent of an emergency fund 401(k), maybe with some assistance from President Trump.

The numbers are painfully urgent: Nearly half of U.S. households lack a basic personal safety net to prepare for emergencies and 140 million Americans have little or no savings at all, according to a recent CFED study. In a Federal Reserve survey, 46 percent of Americans said they’d have difficulty with an emergency expense of $400.

Struggling to Save for Emergencies
“Families are struggling to face financial emergencies. Their inability to respond to shocks is overwhelming and the status quo isn’t working,” said Clinton Key, research officer for savings and financial security at The Pew Charitable Trusts.

Employers are pretty reluctant to do things they aren’t explicitly allowed to do, unless they see other employers doing it
— Aron Szapiro, Morningstar

Clearly, there’s a problem. So why haven’t employers helped with a solution by offering automatic payroll deduction emergency savings plans the way they do for retirement with 401(k)s? “Making savings effortless is crucial in building savings,” said Key.

It turns out, based on experts I’ve interviewed, employers are a little scared about offering such plans. They’re looking for a blessing — as well as incentives — from the federal government.

“Employers are pretty reluctant to do things they aren’t explicitly allowed to do, unless they see other employers doing it,” said Aron Szapiro, head of policy research at the investment research and management firm Morningstar.

What the Law Doesn’t Say
Federal law explicitly permits retirement plans such as 401(k)s; the very name 401(k) refers to a section of the Internal Revenue Service (IRS) code. But there’s no such section for emergency fund plans. So firms worry that offering them could invite nasty tangles with the Labor Department and the IRS as well as liability woes if something goes kaflooey with the bank accepting the emergency savings deposits.

“Could you do it with the current framework? Probably. But there are a lot of unanswered questions and employers may not want to take that kind of risk,” said Szapiro. Some clarity from the Trump administration and Congress could help.

Something else that might help, Key said: “There’s no off-the-shelf product that employers can grab and implement.”

Well, that may be changing.

The Company Trying to Change Things
I’ve come across a company in Atlanta, DoubleNet Pay, that’s beginning to persuade businesses to offer workers emergency fund benefit plans.

“Employees don’t have a personal savings cushion outside of their retirement plans, so I realized there was an opportunity to apply the same principal of automatic contributions out of paychecks for short-term savings as with 401(k) plans,” said Brian Cosgray, DoubleNet Pay’s founder and CEO.

If a company signs up with DoubleNet Pay — and so far, one big home improvement retailer and one large tech company have (Cosgray prefers to keep their names private for now) — it can set up the FDIC-insured emergency-savings accounts any way it wants.

For instance, the employer could offer employees a pre-designated goal of, say, $1,000 or $2,000, or $50 a paycheck. Or it could provide an employer match to entice workers to save for a rainy day. The earmarked pay gets swept to a bank account automatically on payday.

DoubletNet Pay also takes this idea one step further, by helping workers avoid late payments on their bills.

“What we discovered was that in a lot of cases, people are dipping into emergency savings not for a real emergency, like the car broke down or the air conditioning went out, but because a cable bill showed up and they forgotten about it,” said Cosgray. “We have software that goes out on their behalf and logs into their biller accounts, so we schedule the bills to get paid.”

Later this year or early next, DoubleNet Pay will add a “rewards” platform, giving employees awards for increasing their savings goals.

Cosgray told me he expects DoubleNet Pay to enroll over 15 million employees by next year. That may be ambitious, considering how leery businesses are about dipping into these waters. But if the pioneering companies don’t run into problems with Uncle Sam, others just might follow and some benefits firms might ramp up similar services.

What Might Get Employers to Offer the Plans
Pew hopes to start a pilot project for its own test of emergency savings funds through employers, Key told me. “If they get one going, that could encourage others to look at it,” said Szapiro.

Something else that might goose employers to provide emergency savings accounts: a federal tax break. “Even when employers can do something to help workers, they rarely will unless there’s a tax incentive,” said Szapiro.

The Catch-22 for Emergency Savings
There’s one other government problem — a fairly ridiculous one if you ask me — that inhibits some low-income Americans to save for emergencies. Call it the Catch-22 of emergency savings: Putting money away for a rainy day can keep low-income Americans from receiving some government benefits.

Here’s why: Many public assistance programs have what are known as asset limits. As a 2014 Center for American Progress (CAP) report about them explained, the limits require applicants and recipients to certify that the “resources they own are valued below a certain threshold.”

For instance, Temporary Assistance for Needy Families (TANF) has state-set asset limits ranging from $1,000 (Georgia, Indiana, Missouri, New Hampshire, Oklahoma, Pennsylvania, Texas and Washington) to $10,000 (Delaware). The program formerly known as food stamps and now called SNAP (Supplemental Nutrition Assistance Program) has a federal asset limit of $2,250; $3,250 for households with an elderly or disabled member. States can raise or eliminate that limit. Supplemental Security Income, or SSI, has a federal asset limit of $2,000 for individuals and $3,000 for couples or disabled children living with their parents.

The asset limits “serve as a barrier to economic security and mobility by actively discouraging families from attempting to save and build the resources they need to get ahead,” said the CAP report. Or, as Szapiro told me, “Asset limits are a strong incentive not to start saving.”

CAP recommends Congress remove the restrictions for programs like TANF and SNAP and significantly increase the asset limits for SSI to$10,000 for individuals and $15,000 for couples and families with disabled children, indexing them to inflation.

Makes sense to me.