Sidecar Savings Accounts Add to Peace of Mind and Improve Productivity
Sidecar savings accounts are now being discussed as a topic that will strengthen the private retirements system. Emergency savings plans, such as ‘sidecar savings accounts’ could soon become a part of workplace benefits packages if some legislators, policymakers, and employers get their way. These Sidecar Savings Accounts would allow employees to set aside funds to cover financial emergencies, with help from their employer.
Financial stress is a serious reality for many Americans. According to a recent CIT Bank survey cited by MarketWatch, nearly half (48%) of households faced at least one unexpected expense related to an emergency. In addition, 69% of Americans have less than $1,000 in a savings account, according to Prudential Financial. And the No. 1 financial concern keeping millennials and GenXers up at night? You guessed it — not having enough emergency savings for unexpected expenses. It’s No. 2 for Baby Boomers, according to a 2018 PwC Employee Financial Wellness Survey, again cited by MarketWatch.
Clearly, a lack of emergency savings is a huge issue for America’s workforce. That’s why there are such a need for workplace emergency savings plans, or sidecar savings accounts, and why there’s so much interest in making them a reality. Employers recognize that their employees are at their best when they’re happy, healthy and have their finances in order. One way to increase productivity and reduce lost work time due to financial and other stressors is to help employees achieve peace of mind. Emergency savings plans such as the sidecar savings accounts have the potential to help accomplish that goal.
Moreover, a company benefit like sidecar savings accounts can help mitigate, or even potentially eliminate, some of the leakages from 401(k)s or similar retirement plans. As MarketWatch points out, many Americans are tapping their 401(k) accounts for loans or hardship withdrawals to cover financial emergencies. Failing that, they’re turning to costly payday loans to cover short-term financial obligations. Citing data from Transamerica, MarketWatch noted that 29% of workers have taken a loan or an early withdrawal from a 401(k) or similar plan, or an individual retirement account (IRA). And 12 million Americans take payday loans each year, incurring $9 billion in fees. Both of these put their retirement, and their current financial situation, in serious jeopardy. That said, some people don’t have a choice but to tap their retirement savings — or their next paycheck — to deal with a financial emergency. Despite this, Americans recognize the importance of having emergency savings and would value a sidecar savings account benefit if it was offered through their employer, especially if they received matching contributions.
Two emergency savings plan options are currently on the table: sidecar savings accounts and DIY (do-it-yourself). Prudential and non-profit group Prosperity Now, offer sidecar savings accounts which coexist alongside a workplace retirement plan and are funded with after-tax dollars. Once the after-tax emergency funds build up to the employee’s desired level, future payroll contributions can be re-directed into their pre-tax retirement savings account. If the emergency fund’s balance drops below the intended level due to withdrawals, the employee has the option to build it back up again via after-tax contributions. These accounts must be funded with after-tax money because pre-tax savings through employers (outside of retirement plans) are not available under the Employee Retirement Income Security Act (ERISA). The law also does not allow for automatic enrollment into sidecar accounts. A Senate bill currently under consideration seeks to change those rules, however, it is unlikely that bill would be passed in 2018.
Also under consideration is a DIY approach, where employees open a savings account through a bank or credit union, and employers match some or all of the contributions. This type of arrangement could work well for smaller businesses because of the lower cost and administrative burden. MarketWatch notes that some larger companies are embracing the DIY approach as well.
In an era where Americans are chronically stressed about money and consistently scrambling to meet unforeseen financial catastrophes — even a blown tire or transmission can be enough to upset the financial apple cart — an employer-sponsored emergency savings plans like the sidecar savings accounts make sense (and cents, too). They enable workers to build up a little bit of financial security and peace of mind while giving employers the opportunity to help their employees reduce money stressors and stay focused and productive while on the job.
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