Experts Believe Secure 2.0's Emergency Savings Provisions Can Strengthen Short and Long-Term Financial Stability

For many people and families, coming up with the money to cover an unexpected emergency expense can be a real challenge.

According to studies, an unexpected expense of just $400 can prompt people to borrow money to cover the cost. When faced with such bills, workers may be tempted to dip into their retirement savings accounts.

Secure 2.0, new legislation being considered in Congress, would make it easier for workers to set aside emergency funds for retirement. This would provide much needed security for many workers who are struggling to make ends meet.

One potential change would be to allow retirement plan sponsors to automatically enroll employees in an emergency savings plan, whereby a portion of their post-tax income would be set aside each month. This could be done through payroll deduction, making it a hassle-free way for workers to save for unexpected expenses.

Retirees are facing poverty and need help. The "Secure 2.0" plan is designed to upgrade the retirement system and make it more secure. Having an emergency fund is important to avoid making costly mistakes.

The second change would allow retirement plan participants to withdraw up to $1,000 from their retirement savings per calendar year to cover emergency expenses without incurring a penalty. However, the borrower would have to replace those funds within the following three years before making another similar withdrawal.

Although a plan for separate standalone emergency savings accounts outside of retirement plans did not make it into the legislation, this could have helped the nearly 50 million workers who do not have access to retirement plans through their employer, according to Shai Akabas, director of economic policy at the Bipartisan Policy Center.

I am cautiously optimistic that in the next year or two, employers will be able to set up separate and apart from the retirement plan. This would allow for employers to set up this type of plan without having to worry about the retirement plan.

Akabas said that the emergency savings changes, particularly the $2,500 sidecar accounts, could make a big difference. These changes follow efforts that began in 2016 with a Bipartisan Policy Center retirement commission and a subsequent proposal from Sens. Cory Booker, D-N.J., and Todd Young, R-Ind.

Young said that more attention needs to be paid to emergency savings challenges in the United States, and that more tools should be given to rank-and-file Americans to help them address these challenges. He made these comments during a recent panel discussion at the Bipartisan Policy Center.

While some companies have already begun to test out emergency savings plans for employees, the key difference with this legislation is that it will give them the ability to automatically enroll participants, Akabas noted.

Without dedicated emergency funds, individuals often turn to their retirement accounts when they face a cash shortfall. This can lead to the unraveling of their financial security.

After the Covid-19 pandemic, Congress made retirement assets more accessible, which showed how much people rely on their retirement plans when they are financially strained, according to Jeff Cimini, head of retirement product at Voya Financial.

"They took more than we ever expected," Cimini said.

As inflation has increased the cost of living, more and more retirement savers are turning to their retirement accounts to help cover cash shortfalls. According to recent data from Vanguard Group, the share of retirement savers who withdrew from their 401(k)s to cover financial hardships hit a record high in October.

Cimini said that without solving the short-term savings shortfall, it will be impossible to resolve long-term retirement savings needs.

"Voya is strongly supportive of the establishment of an emergency savings option within the context of a retirement plan," he said.

If you want to encourage your employees to save for both their short- and long-term needs, consider offering a retirement account with an emergency fund. This way, they'll know that they don't have to dip into their retirement savings for unexpected expenses.

Cimini said that they are very optimistic that this will have a big impact on long-term retirement security for the U.S. labor force.

Cimini predicted that larger plan sponsors will probably lead the way with adoption of these provisions.

Companies are starting to experiment with emergency savings benefits. BlackRock, an investment firm, has created a philanthropic Emergency Savings Initiative that has tested offerings with companies like ADP (a payroll services company) and Best Buy (a consumer electronics retailer).

Personal finance expert Suze Orman has co-founded fintech company SecureSave, which enables employers to set up emergency funds for employees that include automatic contributions and matches. This innovative company is helping to improve financial security for workers across the country.

Orman stated at a recent Bipartisan Policy Center panel that employers need to take action in regards to saving money, as most people will not do so unless their employer does it for them through a payroll deduction.

The proposed Secure 2.0 changes are a big acknowledgement from Congress that change is needed, said Timothy Flacke, co-founder and executive director of Commonwealth. According to Flacke, this acknowledgement is a positive step forward for vulnerable populations who are working with BlackRock's initiative.

Flacke stated that Congress has essentially said that short-term financial security matters, which is a really big deal.

He said that the changes may not mean that everyone will suddenly have ample emergency savings, but they will make having money set aside much more possible for people, which is a great start.

Flacke noted that people who face high-cost financial emergencies are more likely to have a few hundred dollars of their own money to draw on. This can be a real lifesaver in a difficult situation.