Building Emergency Savings through Employer-Sponsored Rainy-Day Savings Accounts
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Roughly half of Americans live paycheck to paycheck. When financial shocks occur during their working lives, many of these households tap their retirement savings accounts. We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent preretirement needs arise. In particular, we consider plans that would allow employers to automatically enroll workers into an employer-sponsored payroll deduction “rainy-day” or “emergency” savings account.
Having separate rainy-day and retirement savings accounts can facilitate greater saving for short- and long-term purposes by helping to psychologically segregate and catalyze these two motives to save. Auto-features and mental accounting can be jointly deployed to reduce the frequency with which short-term needs crowd out long-run retirement savings.
We describe three specific implementation options: (a) after-tax employee 401(k) accounts, (b) deemed Roth individual retirement accounts (Roth IRAs) under a 401(k) plan, and (c) depository institution accounts. We present pros and cons of each approach, given the existing regulatory regime, relative to the following criteria: the ability to automatically enroll employees into the rainy-day account; the targeted size of the rainy-day account; the investment allocation used for the rainy-day account; the fees and expenses associated with setting up and administering the rainy-day account; employers’ ability to match employee contributions to the rainy-day account and the destination of those matching contributions; the ability of the rainy-day account to provide liquidity when the funds are needed; the tax treatment of contributions to, earnings in, and withdrawals from the rainy-day account; the portability of account balances when employees separate from a sponsoring employer; and compliance and potential interactions with the nondiscrimination rules that apply to tax-qualified employer-sponsored plans.
We conclude that each of the three implementation options merits exploration and field testing.
I have received grant support from the National Employment Savings Trust (NEST), the National Institutes of Health, the Pershing Square Fund for Research on the Foundations of Human Behavior, the Smith Richardson Foundation, the TIAA Institute, and the U.S. Social Security Administration (grant RRC0809840007), funded as part of the Retirement Research Consortium.
I have received research data from Alight Solutions, the Commonwealth Bank of Australia, and Voya Financial.
I am an advisor to and equity holder in Nutmeg Saving and Investment, a robo-advice asset management company. I am a TIAA Institute Fellow.
Please see my website for a complete list of outside activities.J. Mark Iwry
During the past three years, Iwry has --
• made compensated presentations at meetings hosted by various financial institutions regarding retirement savings that have touched on emergency savings accounts,
• consulted on a compensated basis for a major plan sponsor regarding its 401(k) plan, including on occasion the possibility of adding an emergency saving arrangement, and
• been compensated by a nonprofit organization for co-authorship of an article on emergency saving that was issued by the nonprofit organization.
During the past three years, on an uncompensated basis, Iwry has --
• advised state government officials on state facilitated retirement programs using Roth IRAs that are intended to retirement saving but that also lend themselves to use as emergency saving accounts,
• advised congressional staff on the development of proposed federal legislation that would encourage and facilitate emergency saving, and.
• discussed with Treasury and IRS personnel the possibility of issuing guidance relating to the plan qualification rules that would facilitate emergency saving.
In addition, Iwry served between 2009 and January 2017 in the US Department of the Treasury (as Senior Advisor to the Secretary and Deputy Assistant Secretary for Retirement and Health Policy) where consideration was given to a number of the policy, legal, and regulatory issues relating to emergency saving that are discussed in this paper.David C. John
In addition to my position with the AARP Public Policy Institute, I am also a Non-Resident Senior Fellow at the Brookings Institution.Brigitte C. Madrian
Outside Professional Activities For Brigitte Madrian:
In addition to my position as a faculty member and Dean at Brigham Young University, I am occasionally compensated for my participation in outside activities, such as speaking, reviewing, writing/editing articles or reports, consulting, and serving on panels/advisory boards.
In the past few years, I have received compensation in excess of $500 from the following organizations:
National Bureau of Economic Research, FINRA, Brigham Young University, Tor Financial
National Bureau of Economic Research, FINRA, Connect Financial, NAGDCA, Florida Atlantic University Center for Economic Education, Cornell University, Summit Consulting, TIAA
National Bureau of Economic Research, FINRA, State Street Global Advisors, Urban Institute, Journal of Investment Management, Connect Financial, National Council of State Legislatures (NCSL), Boston Research Technologies, Reverse Mortgage Funding, RAND Corporation, Florida Atlantic University, Swarthmore College, UC Berkeley
National Bureau of Economic Research, FINRA, Investment Company Institute, Brigham Young University, State Street Global Advisors, TIAA-CREF, BNY Mellon, Institutional Investor Forums
National Bureau of Economic Research, FINRA, State Street Global Advisors, AARP, Brigham Young University
National Bureau of Economic Research, State Street Global Advisors, TIAA-CREF, Brigham Young University, Stanford University, Government of Canada
National Bureau of Economic Research, State Street Global Advisors, PIMCO, American Bankers Association, The World Bank, Dartmouth College, University of Wisconsin
National Bureau of Economic Research, Social Security Advisory Board, Brigham Young University, The World Bank, TIAA-CREF, State Street Global Advisors
National Bureau of Economic Research, Social Security Advisory Board, Mathematica Policy Research, Columbia University, American Economic Association, University of Washington, Brookings Institution Press, Harding House Publishers, University of Wisconsin, Diversified Investment Advisors, Brigham Young University, National Institutes of Health
National Bureau of Economic Research, Fidelity Investments, Prudential, Wellesley College, University of Michigan, University of Wisconsin, Georgia State University, Professional Insurance Marketing Association, National Institutes of Health
National Bureau of Economic Research, Fidelity Investments, Alliance Bernstein, University of Wisconsin, Austrian National Bank, Institute for Quantitative Research in Finance, Behavioral Finance Forum, Netspar,
National Bureau of Economic Research, Fidelity Investments, Callan Associates, TIAA-CREF, University of Wisconsin, Brigham Young University, University of Michigan, National Institutes of Health