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Less leakage

Rainy-day accounts could help protect retirement assets

The pressure on workers to save for retirement while also being prepared for emergencies could be eased by employer-sponsored rainy-day savings accounts, authors of a new Brookings Institution paper suggest.

Co-authors John Beshears (Harvard University), James J. Choi (Yale University), J. Mark Iwry (Brookings), David C. John (AARP and Brookings), David Laibson (Harvard) and Brigitte C. Madrian (Harvard) are policy analysts and researchers. They found that for every dollar going into 401(k) and similar retirement accounts, as much as 40 cents leaks out before retirement due to emergency needs.

They present three specific implementation options for reducing savings leakage: using after-tax 401(k) contributions for rainy-day savings; using certain Roth IRA contributions within a 401(k) plan; and bank or other depository accounts. The paper delves into the pros and cons of each approach, along with conceptual frameworks for all three.

The three ideas are based on voluntary participation. The co-authors have been talking with key stakeholders about ways to test the ideas.

"We want to think creatively and try things out. That will give us real-world feedback," said Mr. Iwry, who cautioned that any approaches must "first do no harm" by not reducing retirement savings. "The hope here is to find a way to ultimately reduce leakage from the retirement system," Mr. Iwry said in an interview.

The paper, "Building emergency savings through employer-sponsored rainy day savings accounts," is available on the Brookings website.