How SECURE 2.0 pushes employers to support emergency savings

Employees are taking a multi-pronged approach to saving for both the long- and short-term. New legislation, paired with supportive workplace benefits, can help employees proceed with a clear strategy. 

This past December, Congress passed the Omnibus Appropriations Bill, which included a variety of retirement-related provisions that were originally a part of SECURE Act 2.0. Employers will be required to auto-enroll employees into new 401(k) plans at a 3% contribution rate. Employers can also make contributions into a retirement account that matches an employee's student loan payment, bridging the savings gap for those burdened with debt. 

Read more: Secure 2.0 heads to Biden. Here's what it means for retirees 

Additionally, SECURE 2.0 provides emergency saving account options, where employees can automatically allocate a percentage of their income, saving up to $2,500 per year, to pay for emergency expenditures without tapping into a retirement fund. These accounts in particular signal that addressing short-term financial stress must be a workplace prerogative, says Sophie Raseman, head of financial solutions at financial wellness platform Brightside. 

"Emergency savings has been an under-emphasized part of employers' efforts regarding financial wellness," Raseman says. "There's still a legacy of employers focusing on retirement savings, but there's more for them to do by investing in emergency savings. The bill really builds on the evidence that automatic enrollment can dramatically improve participation and healthy behaviors with retirement savings, and is now also extending that to emergency savings." 

Having emergency savings is a persistent issue for employees: 24% have no money at all for an emergency expense, while 39% have less than one month of income saved, according to 2022 research from the Consumer Financial Protection Bureau. For a small minority, using a hardship distribution against their 401(k) could be a solution, though this approach comes with tax penalties and fees, sidelining savings even more. 

Read more: Half of America stopped saving for retirement last year amid soaring inflation

What's more likely is that employees choose to pause their retirement savings while weathering a financial storm — U.S. News and World Report found that 50% of Americans stopped contributing to their retirement savings in 2022 in order to manage cost-of-living expenses. This is where an emergency savings benefit can protect an employee's long-term savings and help them be less reactionary to temporary financial setbacks, Raseman says. 

An emergency savings account operates similarly to a 401(k) — employees automatically have money deducted from their paycheck to fund the account. However, unlike a 401(k), contributions are taxed as income now, and the funds are available as soon as employees need them. 

"Saving is one of those things that is almost always at the top of people's lists of what they'd like to do," Raseman says. "But it is so easy for things to get in the way. When employers have an actual account where they can make it easy to follow through on that guidance, they can get a much higher return on their investment for the program." 

Read more: Emergency savings accounts can help achieve benefits equity

Raseman says employers have previously relied on personal finance coaching, along with an employee's own prerogative to save for emergencies when it comes to the financial wellness benefits they offer. But employees want and need more support: research from the Bipartisan Policy Center found that 42% of employees want to be automatically enrolled in an emergency savings account through their employer, though HR consulting firm Buck found that just 10% offered these benefits in 2022.  

"Education alone is not enough. Coaching alone is not enough," Raseman says. "The most effective programs will actually pair a savings account with a holistic financial health solution where employees have one place to go to handle any of their money needs. This can reduce barriers to saving and then identify opportunities to increase their savings over time, through things like reducing their reliance on high cost debt like credit cards." 

Read more: SECURE Act 2.0 will make retirement savings automatic — how employers can prepare

Employers have until 2024 to implement the emergency savings solutions laid out under SECURE 2.0, giving them time to parse through their current financial wellness offerings and partner with full-service solutions, Raseman says. 

Emergency savings is no longer an individual problem, or even a perk for the best workplaces — rather, the conversation has entered the national dialogue around the role money plays in employees' total well-being. 

"Policymakers have brought employers much more squarely into the thick of the national agenda for promoting emergency savings, and they view the employer as a critical partner in promoting financial health," Raseman says. "Employers don't need to be the experts — they need to find a point of integration where the employee has support for whatever issue they're facing, and the provider will be able to bring to bear whatever basket of solutions is most appropriate to their particular context and their personal needs."