Lack of emergency savings is impacting employees’ retirement readiness and is likely impacting their productivity on the job, according to new research presented at the 2024 Employee Benefit Research Institute’s Financial Wellbeing Symposium in Washington, D.C., today.
Employees with higher credit card utilization are more likely to have lower 401(k) balances, EBRI senior research associate Jake Siegel said.
Those who maxed out their credit cards had an average of $79,800 saved in their retirement plan, as opposed to a balance of $122,050 for those who utilized 20% to 39% of their credit card limits.
In contrast, employees with no credit card balance at all had the highest median retirement plan balance at $187,360.
“If your employee is financially precarious and worried about finances, what impact will this have on their job? It’s not pretty. You want your employees to be focused on their work when they’re on the job,” said Sharon Carson, executive director or retirement insights strategy at JPMorgan Asset Management.
With both the cost of living and the interest rates they pay on credit spiking in the past three years, employees say their need for emergency spending has significantly increased.
Nine in 10 employees report they have experienced a spending spike (defined as 25% above the previous 12 months media spending) and a third of employees said they can’t fund the spikes through income and cash reserves. As a result, 48% increased their credit card debt, 17% took a plan loan and 13% decreased plan contributions, J.P. Morgan found.
While employers may still be exploring the benefits of offering the new pension-linked emergency savings accounts (PLESAs), which were authorized by the SECURE Act 2 beginning December 31, 2023, the accounts can be a rich offering to employees struggling to make ends meet.
The law allowed defined-contribution plan sponsors to automatically enroll workers into PLESAs at up to 3% of post-tax pay, alongside retirement account contributions. The account balance is limited to $2,500 (not counting any employer contributions). Meanwhile, employees can opt out or change their contribution and withdraw funds from the PLESA tax-free and penalty-free at any time, according to the IRS.
Some 69% of employees said that a workplace ESA would be appealing to them, J.P. Morgan found.
While there has still been relatively slow uptake of PLESAs since December, that appears to be changing, Siegel said.
“I think these statistics can help you make your case with employers. Even a modest match can go a long way to enticing employees to save,” Carson added.
Offering employer matches in PLESAs, even small matches, can also help spur employee adoption, David Johns, a senior strategic policy advisor at AARP’s Public Policy Institute said.
Johns recent research has shown that 70% of employees say they want an ESA, while 84% said they would use PLESAs if there was an employer match.
“Incentive does drive use,” Johns added.
In the meantime, large firms such as Fidelity, T. Rowe Price, SecureSave and SoFi have jumped into the market to offer out-of-plan emergency savings accounts, but they are seeking parity with pension-linked accounts, greater simplicity in administration and higher annual contribution limits.
Specifically, the ESA vendors are asking Congress to do away with the exclusion for highly-compensated employees (HCEs or those who earn more than $107,432 or who own more than 5% of the business) which they say is difficult to implement as employees move in and out of HCE categories.
Numerous stakeholders are also asking Congress to increase the maximum annual PLESA and ESA contribution limit to $5,000, which they argue reflects the true cost of emergencies in 2024.
Financial impresario Suze Orman, who is also co-founder of SecureSave, an out-of-plan ESA provider, said such vendors offer a crucial service because employees don’t want their employees to know their personal financial business.
Orman, the keynote speaker at the EBRI conference, said she recently interviewed employees in all 19 Gulfstream Aerospace’s locations in preparation to create an ESA for the company. All expressed privacy concerns.
“They all told me the same thing. When it comes to emergency savings, they said ‘I don’t want my employer to know what is going on in my life. I don’t want them to know that I need a payday loan or have to declare bankruptcy.’” said Orman.
EBRI’s own findings show that while employers think cost or lack of employee financial literacy are the top two impediments to benefits use, employees said it was a desire to protect their privacy from employers.
“They don’t want to share information with employers,” EBRI President and CEO Barb said.