Employers are increasingly recognizing the value that financially secure workers bring to their organizations — and their role in enabling that financial security. In particular, business leaders in recent years have come to understand that a lack of financial security causes employees financial stress, which has a significant impact on their companies — by some estimates, costing $250 billion a year in lost productivity. In addition, with the rise of stakeholder capitalism, firms also have a moral imperative to advance worker financial security.
The problem is clear to corporations, and the appetite from workers for employer-sponsored tools to increase financial security exists. In an AARP survey, more than 7 in 10 workers said they would be likely to participate in a payroll deduction rainy day savings program if their employers offered one. A recent survey indicated that 69% of Americans shifted focus from spending to saving post-COVID-19, and 6 in 10 respondents said that given the coronavirus pandemic, they were better prepared for a future financial emergency.
Low- and moderate-income, or LMI, Americans lack emergency savings, in part because they lack access to high-quality, liquid savings vehicles. Financial insecurity is a widespread problem, particularly for LMI workers, and it adversely impacts Black and Hispanic households and women. Employers, with their regular involvement in the financial lives of their workers, are uniquely positioned to address the American savings crisis.
Eight in 10 employers in a 2020 Bank of America survey said they believe employee financial wellness helps deliver more loyalty, better productivity and other tangible benefits. And a Commonwealth study indicated savings tools offered by employers would be particularly beneficial for LMI employees, who reported that employer financial wellness interventions such as savings tools at the time they got a raise would reduce stress (74%), enhance productivity (62%) and increase their likelihood of staying with the company (76%).
As employers move toward improving financial security for employees, the easiest, most automated tools will have the best take-up. For emergency savings, this means accounts should be integrated into payroll to enable employees to seamlessly save a portion of each paycheck.
Retirement record-keeper platforms are already integrated into payroll and thus are well-positioned to provide emergency savings accounts to employees.
For example, Voya Financial, which reaches more than 6.1 million retirement plan participants, has joined BlackRock's Emergency Savings Initiative. By working together with Commonwealth, a philanthropic organization with deep consumer research on the unique needs of LMI workers, Voya will help provide and expand access to broad financial solutions, including emergency savings programs, for retirement plan participants.
Record keepers are increasingly aware that worker financial security is also key to their success. For example, in February 2020, Voya Financial found that individuals with inadequate emergency funds are 13 times more likely to take a hardship withdrawal from their retirement account as compared to those who had an adequate emergency fund, defined as three or more months of living expenses.
Our own research has supported this finding. In a study with the Defined Contribution Institutional Investment Association's Retirement Research Center on how low- and moderate-income plan participants were managing their retirement accounts during the pandemic, we discovered that employees with little or no savings were twice as likely to take a negative action on their retirement account, such as pausing their contributions or taking an early withdrawal or loan.
Industry-leading companies are already taking action to offer quality emergency savings products to their employees, thereby paving the way for other companies to follow suit. Last fall, our work with Voya through BlackRock's Emergency Savings Initiative brought emergency savings to 90,000 United Parcel Service Inc. employees — widely touted as workplace savings at scale. These innovations have the potential for fast, widespread uptake of proven tools that address the savings needs of financially vulnerable workers.
Adding emergency savings tools to retirement platforms has another benefit as well: It opens a new pathway to long-term financial security and opportunity. LMI employees who are less likely to participate in retirement saving plans are more likely than their higher-income counterparts to express interest in a payroll-deduction rainy day savings program. LMI employees often face financial volatility and need to reach some level of stability before they can consider participating in longer-term savings options, like retirement plans. Thus, offering emergency savings solutions as the "first ask" gives record keepers the opportunity to engage employees who are not making pre-tax contributions. Emergency savings can serve as an on-ramp for retirement savings.
As American workers weather an increasingly urgent economic crisis, employers and record keepers have a critical role to play in addressing the systemic financial issues they face. Straightforward emergency savings interventions that address the unique needs of LMI workers not only improves individuals' financial security and opportunity, but also benefits employers and record keepers. Such benefits include increased employee engagement, stronger existing benefits programs, increased employee savings rates, and reduced early retirement withdrawals. Further, the increased adoption of the stakeholder capitalism world view will make positively impacting worker financial security a core requirement of any leading firm.
Nick Maynard is senior vice president and Catherine Wright is a senior innovation manager at Commonwealth, a non-profit organization that seeks to build financial security and opportunity for financially vulnerable people through systemic change. They are based in Boston. This content represents the views of the authors. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.