The close of the 13th annual America Saves Week presents a “good opportunity” to step back and reflect on where policies are promoting productive habits for Americans and the economy, and where they are not, says Phil Waldeck, president and CEO of Prudential Retirement.
Innovations in 401(k) plan design, fostered by the Pension Protection Act of 2006, have clearly evolved retirement savings, says Waldeck.
But focusing policy on retirement savings provides only a limited context for measuring the country’s personal financial health. “There are other barriers impacting Americans,” said Waldeck. “Particularly when it comes to savings and emergencies.”
How unprepared are Americans to cover unexpected financial shocks? Different answers are found in different data sets.
The median savings account balance was $7,000, and the average balance $30,600, according to the 2016 Survey of Consumer Finances, conducted every three years by the Federal Reserve. That data is pulled from respondents that have active savings accounts.
Aggregate savings balances have grown considerably since the financial crisis, increasing 74 percent between 2009 and 2013, and reaching $9.2 trillion by June of 2018, or more than twice what it was in 2008, according to Fed data.
While encouraging, that data is skewed by higher savings rates of wealthy households, according to analysis by ValuePenguin, an online clearinghouse for bank loans and financial service products.
“The growth in total savings was likely due to a few household with extremely high savings,” write analysts at ValuePenguin, who say the Fed’s data actually shows decreases in saving rates from a plurality of households.
A recent survey from gobankingrates.com found 58 percent of respondents have less than $1,000 saved; 26 percent has zero savings.
Prudential’s own data shows 63 percent of Americans don’t have the savings to cover a $500 emergency, with 25 percent spending all of their earnings, or more, every month.
Government shutdown underscores need for emergency savings
While data on paltry savings is commonly circulated in financial media—and is emerging as a talking point among Democrats vying for the 2020 presidential nomination—Waldeck says the recent experience of federal workers during the government shutdown is a wakeup call for the financial services industry, lawmakers, and savers.
In the aftermath of the 35-day partial shutdown, which impacted about 800,000 workers, Prudential surveyed more than 350 federal employees and contractors.
Half said they fell behind on bills; 27 percent missed a mortgage or rent payment, 13 percent missed a student loan payment, and 10 percent missed a tuition payment.
Of those that had an emergency savings stash, 35 percent reduced or exhausted it; 42 percent used credit cards to cover costs; 26 percent tapped retirement accounts, either through loans or early withdrawals.
Only 11 percent said household finances were not impacted. More than eight in 10 reported increased stress levels.
While real, the ramifications were relatively muted, as Prudential’s survey shows federal workers were better equipped to weather a financial emergency than Americans in the private sector.
Sixty-one percent went in to the shutdown with at least $1,000 in emergency savings, compared to 46 percent of the general population that have as much, according to Prudential’s data. Just 11 percent of federal workers said they had no emergency savings, compared to 40 percent of the general population.
A 401(k) sleeve for emergencies
Employers’ and industry’s focus on bolstering retirement savings is as commendable as it is necessary, but Waldeck says the experience of the shutdown shows more focus is needed to address “insufficient resiliency and short term savings.”
Last year, Prudential—recordkeeper to more than 4,000 retirement plans—rolled out a new plan feature that allows sponsors to set up an after-tax emergency savings sleeve within existing 401(k) plans.
Contributions are segregated from general retirement savings and invested in short-term, principal-preserving investments such as money-market funds. Withdrawals are subject to a 10 percent tax on the investment earnings on contributions.
A hypothetical $1,000 withdrawal from a low-yielding money market fund would result in a minimal cost to savers relative to what they would other wise pay from a bank loan or taking on credit card debt to cover an emergency, said Waldeck.
“The opportunity here is to use the workplace and ease of payroll deductions,” he explained.
Last year, the Strengthening Financial Security Through Short-Term Savings Act was introduced in the Senate about the time Prudential rolled-out its new initiative.
That bill would amend ERISA to allow savings accounts astride 401(k) plans. Savings accounts would not be allowed to exceed $10,000 and would be backed by the FDIC. Importantly, the bill allows workers to be automatically defaulted into the plans.
Like the rest of retirement legislation in the 115th Congress, the bill stalled. Sen. Heidi Heitkamp, D-ND, who lost her seat in the November election, sponsored the bill. Sen. Cory Booker, D-NJ, Sen. Todd Young, R-IN, and Sen. Tom Cotton, R-AR, were co-sponsors.
Ideally, Prudential’s savings option would be accommodated by an automatic enrollment feature. That will take an act of Congress, but Waldeck said it was important to advance the option irrespective of lawmakers’ attention.
So far, sponsors have been receptive to the idea. Initial adoption of the rollout has been inline with Prudential’s expectations, but it is still early in the learning curve, said Waldeck.
“We’re having a lot of conversations on emergency savings,” he said. “Employers care about the topic and are super engaged.
There are barriers. Plans would need an after-tax Roth option to build the savings sleeve. Sponsors would also have to invest in educating workers. How a plan designs the employer match also has to be considered, as does the prospect of after-tax contributions cannibalizing pre-tax retirement savings.
And if the feature is only used by highly compensated employees, sponsors could risk failing non-discrimination testing. A workaround could be making the option only available to non-highly compensated workers, said Waldeck.
The feature also requires plan documents to be amended, a “time and cost” barrier that Waldeck acknowledges. Plan providers could go a long way to helping sponsors navigate the barriers. Introducing the option during open enrollment for health plans or during the holidays would be counter productive, he said.
An add-on to RESA
On Capitol Hill, more lawmakers are aware of the need to address emergency savings gaps.
“There is a cohort that gets this and see it as a need for society,” said Waldeck. “Americans are vulnerable. The question is what can we do with policy to address that. The government shutdown was a real wakeup call for people. We know what works, and that the workplace can be an efficient starting point.”
Ideally, an amendment to the Retirement Enhancement and Savings Act would include a provision to allow for automatic enrollment in emergency savings plans.
Then, of course, Congress would have to pass RESA.
“I’m hopeful this will be the year legislation happens,” said Waldeck. “But I was saying that last year too.”
Waldeck says his guess is as good as anyone’s as to whether Congress will move on RESA.
“We just don’t know. But sooner or later, we need RESA to be passed,” added Waldeck.