A new era for emergency savings after SECURE 2.0

Building an emergency savings fund is a cornerstone of financial wellness, and many workers struggle to save for retirement due to lack of emergency savings. The Employee Benefit Research Institute found that in any year, 90% of employees experience a spike in expenses that is not covered by income, and 1 in 3 could not cover the expenses with savings. More than 60% leverage credit cards or a retirement loan to pay for these expenses.¹

These premature withdrawals from retirement accounts undermine long‑term savings goals. However, there is a growing understanding within the retirement industry that, given participants’ financial realities, employees are more likely to safeguard their retirement savings for the future when they know some penalty‑free funds are accessible for emergencies.

Legislative changes drive innovation and adoption of emergency savings

Despite recent legislative changes, employer‑sponsored emergency savings accounts are not new. Over the last decade, the emphasis on financial wellness programs has increased significantly as employers have shifted toward supporting not just retirement savings but overall financial health. Many plan sponsors have offered out‑of‑plan emergency savings solutions as part of their financial wellness offering.

Provisions in SECURE 2.0 have further enhanced the landscape of workplace emergency savings by introducing new opportunities and incentives for employers to implement in‑plan solutions. These legislative changes are poised to drive greater adoption. Recent survey data indicate that 70% of advisors and consultants anticipate a rise in the adoption of in‑plan emergency savings solutions over the next three to five years, while 52% expect an increase in out‑of‑plan solutions.²

Demographic disparities suggest increasing need for emergency savings solutions

In our latest Retirement Savings and Spending Study, 33% of respondents said that they were not saving enough for retirement, and 21% were uncertain (Figure 1).³ Among those not saving enough, 26% prioritized building an emergency fund. Data from T. Rowe Price’s recordkeeping platform shows that nearly 1 in 5 participants (19.4%) had an outstanding loan balance, and 1.6% took a hardship withdrawal in 2023.⁴ The deferral rate for participants taking multiple small loans annually was lower, on average, by 2.3 percentage points.

Key takeaway
The retirement industry acknowledges that access to emergency funds could help preserve retirement savings. Providing an emergency fund, whether inside or outside the plan, can help participants cover unexpected expenses without derailing their long‑term financial goals.

Data also show that Black and Hispanic workers are more focused on building an emergency fund compared with their white and Asian counterparts (Figure 2). They are often more disproportionately affected by financial stress, with Black and Hispanic workers more likely to take early withdrawals. Black participants are also more likely to have outstanding loans compared with their white peers.⁵ These early withdrawals erode long‑term compounding benefits, causing minority workers to lag in retirement savings.

An increased focus on these disparities in retirement plans could further drive the adoption of emergency savings solutions. Plan sponsors, as trusted sources of financial wellness resources, can help these vulnerable populations achieve better long‑term financial health by providing access to and educating them about the benefits of emergency savings. This buffer can help limit withdrawals from retirement savings during sudden financial needs and reduce leakage.

In‑plan and/or out‑of‑plan options: Plan sponsors should choose carefully

An emergency fund, whether inside or outside the retirement plan, helps savers cover unexpected expenses without incurring additional debt, taking plan loans, or withdrawing from plan balances with penalties. Plan sponsors have several options for offering such accounts:

In‑plan emergency savings programs: SECURE 2.0 provides two main paths for in‑plan emergency funds:

• Emergency withdrawals: Participants can take one penalty‑free emergency withdrawal of up to $1,000 per year. No additional emergency withdrawals can be made for the next three years unless the distribution is repaid, or equivalent contributions are made.
• Pension‑linked emergency savings accounts (PLESA): These accounts allow participants (excluding highly compensated employees) to contribute up to $2,500 on a Roth basis, invested in short‑term vehicles like money market funds. Funds can be withdrawn penalty‑free as often as once per month.

While in‑plan emergency withdrawal options are gaining traction due to their implementation simplicity, PLESAs are less popular due to perceived complexity and pending regulatory guidance. Although these withdrawals still involve funds being taken from an account linked to a retirement plan, their long‑term impact is less significant because they are penalty‑free.

• Out‑of‑plan emergency savings programs: Overall, more plan sponsors are favoring out‑of‑plan emergency savings accounts for their simplicity, flexibility, and ability to contribute larger amounts. Preliminary results on our recordkeeping platform indicate promising outcomes; for one of our plan sponsor clients, plan participants with an out‑of‑plan emergency savings solution did not take any new loans or distributions from their retirement plan, and 15% increased their total salary deferral during the period from January 22, 2024, through April 24, 2024.

Employers play a critical role in shaping the financial well‑being of their workforce. Recordkeepers, advisors, and consultants can help plan sponsors evaluate whether an in-plan or out-of-plan solution would be the best fit for their participants. By leveraging the opportunities presented by SECURE 2.0 and adopting innovative emergency savings solutions, plan sponsors can help foster a more secure and resilient financial future for their employees.

Key considerations for plan sponsors, consultants, and advisors

• Weigh the benefits versus the risks: Employers need to balance providing short‑term financial relief against the risk of reduced long‑term retirement savings. Recordkeepers, consultants, and/or advisors can assess needs and assist plan sponsors in implementing effective solutions.
• Implement pilot programs: Pilot programs allow employers to assess the effectiveness of emergency savings features before full‑scale implementation. This phased approach helps in fine‑tuning the programs to better suit participant needs and organizational capabilities.
• Communicate and educate: Effective communication and education about the benefits and mechanics of emergency savings programs are vital to achieving higher participation rates and better financial outcomes.

 

Appendix

2021 Defined Contribution Consultant Study: The study included 51 questions and was conducted from September 20, 2021, through November 2021. Responses are from 32 consulting and advisory firms with more than $7.2T in assets under administration.

2023 Retirement Savings and Spending Study: The study was conducted between July 24, 2023, and August 13, 2023. It included 3,041 401(k) participants, full‑time or part‑time workers who never retired, currently age 18 or older, and either contributing to a 401(k) plan or eligible to contribute with a balance of $1,000 or more. The survey also included 1,176 retirees who have retired with a Rollover IRA or left‑in‑plan 401(k) balance.

2024 Defined Contribution Consultant Study: This study included 48 questions and was conducted from January 12, 2024, through March 4, 2024. Responses are from 35 consulting and advisor firms with over 134,000 plan sponsor clients and more than $7.5 trillion in assets under administration.

2024 Defined Contribution Plan Sponsor Considerations and Actions on Retirement Income Study: The survey was fielded from November 14, 2023, through December 22, 2023. Data reflect responses from 119 plan sponsors that have a role in overseeing and/or selecting their organization’s DC plan investment offerings and indicated a combined approximate DC plan asset size of $100 million or greater.

2024 Exploring Individuals’ Retirement Income Needs and Preferences Study: Data reflect responses from 2,582 individual investors age 40 to 85 who were currently enrolled in a DC plan and had at least $100,000 saved in their plan accounts. The survey was fielded from December 2023 through February 2024.

2024 T. Rowe Price Retirement Savings and Spending Study: The study was conducted between July 17, 2024, and August 7, 2024. It included 3,005 401(k) participants, full‑time or part‑time workers who never retired, currently age 18 or older, and either contributing to a 401(k) plan or eligible to contribute and have a balance of $1,000+. The survey also included 1,012 retirees who have retired with a Rollover IRA or a left‑in‑plan 401(k) balance.