Too many defined contribution plan participants are ill-prepared for a financial emergency, much less adequately prepared for retirement, industry experts say.
That's prompting plan sponsors in the U.S. as well as in the U.K. to investigate ways to help people build up supplemental savings so employees don't raid their retirement plans, should an unexpected financial hit take place, industry sources said.
"In the last (few) years, businesses have understood that financial health affects (their) bottom lines and they are helping their employees retire on time," said Alison Daigle, senior product manager at Jellyvision Lab Inc. in Chicago, a communication software provider used by DC plans.
Industry sources in the U.K., where contribution to a retirement scheme is mandatory, said that with the rise of the gig economy, and the resulting volatility of income given the unpredictable nature of freelance assignments, it's even more important that workers have a source of liquid savings.
Although opinions on how these emergency funds could be set up vary considerably, industry participants agree there is a pressing need to incorporate debt management tools into retirement programs, so participants are not tempted to tap into their retirement savings, reduce contributions or opt out of a plan altogether.
In the U.K., NEST Insight, the research unit of the £2 billion ($2.8 billion) National Employment Savings Trust launched an emergency fund project in March, which aims to engage employees who save with different DC providers to test an emergency, or sidecar, fund idea.
"Participants will make voluntary contributions via payroll deductions to an emergency fund sitting alongside their retirement account, and they will be able to tap into the sidecar account in the event of financial hardship," said Will Sandbrook, executive director at NEST Insight in London, in a telephone interview.
"However, when the savings in the (sidecar) account reach a threshold of around £1,000, the contributions will begin to flow into the retirement account. Should participants need money for financial emergencies, the pot will be available to participants to draw down much like what participants can withdraw from the 401(k) plans in the U.S.," under hardship loan provisions, Mr. Sandbrook said. In the U.K., loans from DC plans are not allowed. The emergency fund intends to mimic a 401(k) loan, which U.S.-based plans often work to minimize in order to retain assets in plans.
Adding a sense of urgency to the discussions in the U.K. is a mandatory increase in participant contributions to 3% from 1%, starting April 6. Sources said participants might start opting out of their DC plans because they will not be able to afford the higher contributions, given their other needs. NEST Insight collaborated with researchers at Harvard Kennedy School to roll out this project ahead of the contribution changes.
Variety of forms
The implementation of emergency funds could take a variety of forms, sources said. Mr. Sandbrook said in the U.K. it could be done through a retail bank account. For the purpose of the emergency fund project, NEST Insight has invited employees saving with all U.K. DC providers to participate and has set up a bank provider to conduct the trial.
Under the trial, the bank will house the individual savings accounts and transfer any excess savings to the DC provider.
The study, said Zoe Alexander, director of strategy at NEST, will help NEST and its industry partners determine the best approaches to serving DC participants. NEST has no immediate plans to consider changes, Ms. Alexander said, given that the research is still in the very early stage.
Meanwhile, in the U.S., companies already are exploring ways in which they can help employees earmark dollars for emergency funds, sources said.
Ultimately, sources agreed, that responsibility for emergency savings rests with the employee. So employers' voluntary efforts to date hinge on offering various incentives to encourage savings.
JellyVision's Ms. Daigle said: "Employers are taking steps to ensure that their employees retire on time. And they are doing this through a number of efforts, such as matching fund programs where they sponsor, e.g., a 3% contribution into a savings account for emergencies if the employee seeds the account with 3%."
Other employers are putting an additional 1% in contributions to an employee's 401(k) account if the employee puts, say, $1,000 into a savings fund, Ms. Daigle said, recounting efforts of its clients.
However, emergency fund contributions would not be tax deductible for the employer or the employee, she said.
The costs of setting up emergency funds and taking deductions via a payroll system as well as the administration associated with enrollment would need to be addressed before these funds could take off on national levels, sources cautioned. Sources said until there is no fiduciary liability for sponsors, emergency funds are not expected to be provided by employers as part of retirement arrangements.