It’s hardly news that Americans are woefully unprepared to handle a financial emergency. Study after study has shown that many families have meager cash reserves to fall back upon.
More than half of employees — 54% — live paycheck to paycheck, according to the 2022 Wellbeing and Voluntary Benefits Survey from Buck, a human resources consulting and benefits administration firm. Meanwhile, the Bipartisan Policy Center found 42% of employed adults surveyed this year feel somewhat or very financially insecure. Nearly 1 in 4 consumers has no emergency savings whatsoever, the government Consumer Financial Protection Bureau says.
While the studies — and the balance in your savings account — may be discouraging, there could be help coming from an unexpected place: your employer. One of the newest innovations available to workers today are emergency savings accounts, which are offered as a workplace benefit to make it easier to build a rainy-day fund.
[Read: 7 Apps to Save Money on Dining Out.]
Employers Look for Ways to Help Workers
Nearly a third of workers surveyed by Buck say budgeting and money management resources are among the workplace benefits they value most. Employers are taking notice, and many now offer more financial tools to their workforce.
“We really saw this take hold in the last few years,” explains Tom Kelly, voluntary benefits national practice leader for Buck. About 10% of employers surveyed by Buck currently offer emergency savings accounts, and 12% say they plan to in the future.
Helping workers weather financial storms may ultimately benefit the company as a whole. Research out of the Massachusetts Institute of Technology found that improving financial security for low-income Indian workers boosted productivity by 7% and reduced costly mistakes.
Workplace benefits such as emergency savings accounts might also reduce employee turnover. “Financially insecure workers are more likely to seek work elsewhere,” according to Kelly.
SoFi at Work found that 48% of the workers it surveyed for its Future of Workplace Financial Well-Being Report say they are more likely to stay with an employer that offers financial well-being benefits. Emergency savings accounts are an easy way for businesses to fill that need for their workforce.
Emergency Savings Accounts: Seamless Savings Tool
Employer-sponsored emergency savings accounts may go by a variety of names such as sidecar accounts or rainy-day accounts, but they all work in basically the same way. They are set up through the workplace and allow automatic deposits of after-tax dollars from a paycheck to a savings account. Money in the account can be accessed at any time with a debit card or electronic transfer.
“So what makes ESAs different than simply saving money?” says Angelo DeCandia, professor of business at Touro University in New York City. “The largest single difference is that ESAs are set up through your employer and funded through payroll deductions.”
That makes contributions to emergency savings automatic and eliminates the need for workers to find the self-discipline and time to manually move money. Some employers may also offer incentives to encourage workers to save.
“On the high end, you have employers actually contributing money into an account for employees,” says Barrett Scruggs, vice president of financial well-being for SoFi at Work.
Plus, depending on how they are set up, these accounts could work seamlessly with an existing 401(k) or other retirement account. For instance, it may be possible to link an emergency savings account to a retirement fund so once the balance in the emergency fund reaches a certain amount, money can be easily shifted to retirement.
The Consumer Financial Protection Bureau made it easier for employers to set up emergency savings accounts when it issued a template that could be used to develop automatic savings programs. That template was released in July 2020, and in October 2020, UPS became the largest employer to launch an emergency savings initiative. Its program allows 90,000 nonunion workers to set aside after-tax dollars for emergency savings.
Since then, DeCandia says companies such as Starbucks, ADP and Transamerica have added emergency savings accounts to their benefit packages.
[See: Prepare Your Finances for the Holidays.]
Other Workplace Options for Emergency Help
Interest in emergency savings accounts is picking up, but Scruggs says that’s not the only way businesses are helping their workers with money. “Employers are giving their employees more access to financial planning tools,” he says.
For instance, some workplaces may provide online tools and apps that can make budgeting easier. Others may offer complimentary consultations with financial planners. Financial counseling is also available through some workplaces and can be helpful to those navigating an emergency.
Although not as common, emergency cash grants are offered by some businesses. Also known as employee hardship funds or employee relief funds, these may provide direct financial aid to workers with a critical need, such as a car repair or rent payment. These programs may be set up so that employees receive a certain level of assistance from the fund and then pay it back over time using payroll deductions.
“In the final analysis, emergency savings accounts may be just one more example of the ‘nudge’ theory as formulated by Nobel laureate Richard Thaler,” DeCandia says. That theory suggests that by making the preferred action automatic by default, people are more likely to embrace it. In this case, that would mean signing workers up automatically for emergency savings accounts but letting them opt out if they wish.
Some people may say automatic enrollment is overreach on the part of employers. But given the alarmingly low savings rate of Americans left to their own devices, maybe it isn’t such a bad thing.
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How Your Employer Can Help You Build Emergency Savings originally appeared on usnews.com
Update 11/15/22: This story was published at an earlier date and has been updated with new information.
