Emergency Savings Accounts: Why they benefit both employers and staff

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.