For plan sponsors, nothing is off the table when it comes to solving a problem that the pandemic pushed to the fore: the lack of emergency savings among low- and middle-income Americans.
Plan sponsors are not only backing proposed legislation that would allow participants to withdraw up to $1,000 in emergency funds from their retirement accounts. They're also evaluating what types of emergency savings vehicles to offer their employees, considering both "in-plan" and "out-of-plan" savings options. Many are even considering reinstating long-discarded plan provisions that would make in-plan savings possible.
"The pandemic really drove home the need for having emergency savings, whether it be in a bank, within the retirement plan or within other qualified savings options," said Alexandra Moen, a regional retirement plan consultant with Francis Investment Counsel LLC in Minneapolis.
Many plan sponsors see an easy fix in proposed emergency savings legislation introduced by Sen. James Lankford, R-Okla., and Sen. Michael Bennet, D-Colo., on May 27. The bill — called the Enhancing Emergency and Retirement Savings Act of 2021 — would allow participants to withdraw up to $1,000 from their retirement savings accounts for emergencies such as unexpected roof repairs, without having to pay the 10% early withdrawal penalty if under the age of 59½. They would be allowed to draw only from vested amounts over $1,000. "The idea is that individuals should have a base of retirement savings — that is, $1,000 — before they should be able to make emergency withdrawals," said Kent Mason, a partner at Davis & Harman LLP in Washington.
Participants would be permitted to take one emergency distribution annually provided they replenish any prior emergency funds they withdrew, Mr. Mason said.
Plan sponsor trade groups widely support the measure, saying greater access to retirement savings for emergencies would persuade more people to participate in retirement plans.
"Allowing participants access to savings for emergencies will encourage participation in retirement programs — particularly for those who may be hesitant to 'lock away' money in case they will need it later," Aliya Robinson, senior vice president of retirement and compensation policy at The ERISA Industry Committee in Washington, wrote in a letter to Messrs. Lankford and Bennet.
Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council in Washington, shared similar views. "Even relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many workers and fear of those expenses can keep them from saving," she wrote in a letter to the senators.
Alicia Munnell, director of the Center for Retirement Research at Boston College, doesn't see much harm in the bill, saying $1,000 is "so little money that it makes it not troublesome." In fact, the emergency withdrawals proposed in the bill "might be an easier, more direct way of getting at the problem" than emergency sidecar accounts, which are very cumbersome to set up, she said.
Not everyone, though, likes the bill. Robyn Credico, Willis Towers Watson PLC's Las Vegas-based defined contribution consulting leader, fears that participants would not return the money they withdrew from their retirement accounts for emergencies.
"It's not likely that people will put the money back or make it up," she said of the proposed emergency withdrawal measure, which allows participants to recontribute what they withdrew within three years.
Instead, Ms. Credico favors the use of emergency savings accounts. "I'd rather see employers help people save in a rainy day fund than take money out of their retirement plan because I don't think people will pay it back," she said.
While there are no known official surveys on the number of plans offering emergency savings options, industry observers say the number is negligible. None of Willis Towers Watson's plan sponsors clients offer emergency savings accounts, except "maybe one," Ms. Credico said.
Francis Investment Counsel's Ms. Moen also reports relatively few plan sponsors offering emergency savings programs but says that many are thinking about putting them in place. "I know that there are a number of employers that are currently evaluating implementing a program in some form," she said.