SECURE 2.0 links emergency savings to retirement plans: 8 best practices

The SECURE 2.0 Act, signed into law at the close of 2022, introduced a new way for retirement plan sponsors to offer emergency savings accounts inside individual account retirement plans.

The array of options for supporting employees with emergency savings was already complicated prior to the new law, and this adds another piece to that puzzle. So how can employers maximize this new workplace savings option and choose the best approach for their employees’ needs?

The new workplace savings accounts under SECURE 2.0

The first step is to demystify exactly what Secure 2.0 entails as far as workplace savings accounts. This new legislation allows individual account retirement plans to have an emergency savings account within them, effective after December 31, 2023. The main features of these accounts are:

  • Employers may automatically enroll employees into these accounts up to 3% of pay.
  • Contributions are capped so the account balance does not exceed the lesser of $2,500 or an amount set by the plan sponsor. After this, contributions may be automatically redirected to a Roth retirement account in the plan, if the employee has one.
  • Employee contributions are made like Roth contributions, after tax.
  • The money must be invested in an interest-bearing deposit account or an investment product designed to preserve principal.
  • The savings contributions by the employee count for the purposes of any employer match in the plan, up to the same dollar amount as the account balance limit ($2,500 or less as set by the plan sponsor). These matching dollars must be directed to the retirement account within the plan, not the savings account.
  • Only non-highly compensated employees are eligible.
  • Employees are allowed to withdraw up to the full account balance at least once per calendar month. The first four withdrawals in the plan year must be free.

For savings accounts to make an impact, financial wellness is needed

In order to maximize the impact of a workplace savings program, it’s important for employers to consider a learning based on decades of research and trial and error across the financial health sector: emergency savings education alone is not enough.

If employer programs don’t make it easy to save, employees won’t follow through on even the best financial education. What’s more, the most financially stressed employees are the least likely to have an existing savings account or be well-served by retail savings providers, which is why workplace savings programs often have low engagement.

Furthermore, a program focused on savings alone simply doesn’t go far enough to meet employees’ financial needs.

Take 401(k)s: automatic enrollment has created impressive levels of participation, but plans have also experienced high levels of leakage, with employees withdrawing funds early, often for hardship reasons. Employers run the risk of recreating the exact same cycle with emergency savings accounts if they don’t offer holistic solutions for their employees.

From helping remove barriers to enable saving – such as reducing bank fees, curbing impulse spending or helping other household members find work – to tackling debt, long-term holistic financial wellness can be pivotal in helping employees and their families strengthen their financial health. And when emergencies do come up, holistic financial wellness can provide additional opportunities to institute good financial habits – such as regular savings – to help prevent similar financial emergencies from wreaking havoc in the future. I’ve found intervention in these moments leads to about half of people starting to save actively.

8 design best practices employers should apply to savings features

Beyond holistic care, the design of employers’ programs is also important in maximizing effectiveness, whether employers offer savings accounts inside or outside their retirement plans. Below are eight best practices to keep in mind whether employers are using a holistic financial wellness program or a dedicated solution for emergency savings.

  1. Low- to zero-friction onboarding. To achieve mass participation, it is critical to make it as easy as possible for employees to start saving. When it comes to workplace savings, automatic enrollment or embedding enrollment into existing processes like new hire onboarding or annual open enrollment are great approaches.
  2. Payroll deduction for automatic saving. Behavioral finance research has shown that “set it and forget it” is the most effective way to maintain a savings plan. But automatic recurring ACH transfers from bank accounts to savings — popular among higher earners — are not suitable for employees who lack emergency savings and are at higher risk for large overdraft fees. Some newer solutions have attempted to use technology or guarantees to avoid overdrafts, but the technology that supports this approach is still limited by legacy U.S. bank data and payments infrastructure, and the Consumer Financial Protection Bureau has recently cracked down on this approach.
  3. FDIC-insured deposits. When faced with unfamiliar investment options, employees may worry they’ll make a mistake and decide to opt out.  So for a financially stressed household, FDIC-insured deposits (for example, traditional bank savings accounts) are the gold standard for trust. Easy to understand and with a government guarantee that money will be there when needed, FDIC-insured accounts are particularly relevant with worrying headlines about the crypto market crash and speculation about the “next financial crisis.”
  4. Appropriately conservative options. Emergencies don’t give notice. As such, emergency savings solutions should prioritize security and liquidity over return. FDIC-insured deposits are the simplest way to help meet this need for employees, but at a minimum, guardrails should be in place that prevent employees from putting their rainy day fund into risky, volatile assets. Look closely at what providers offer — some accounts are marketed as workplace emergency funds without these protections.
  5. Quick, free access to money. For higher income employees, waiting a few days or even a week for access to funds is often only a mild irritation thanks to cushion in spending accounts for everyday needs or temporary sources of cash like credit cards or family. But for the most financially stressed employees, accessing funds quickly could mean the difference between being able to buy the gas to get to work that day, refill an important prescription, or keep the lights on. It pays to look at the fine print — what will the typical wait times be for your employees on withdrawals? What kinds of fees might they be charged (e.g., to access funds more quickly)? Do they have to request funds by phone or only during specific times? SECURE 2.0 does not have stringent requirements on the timeliness or accessibility of employees’ funds, but employers should keep this in mind in their program designs so as to fully realize the benefits emergency savings should provide.
  6. A way to access money without using costly services like check-cashing. Five percent of the country still doesn’t have a bank account, and that number grows to 11% for African American households and 9% for Hispanic households. To overcome this barrier, employees need a fee-free way to access money from their savings account. For example, a program could provide unbanked employees with a debit card account that they can use to withdraw their savings and spend their funds.
  7. No temptation to spend. The ideal savings program lets employees access their money quickly and uses “nudges” to discourage them from raiding savings for impulse spending. But some workplace savings programs do the opposite by replicating the look and feel of checking accounts. And while debit cards can be a great tool to provide the unbanked access to their emergency savings, debit cards also run the risk of inadvertently sending the signal that it’s okay to spend emergency savings when it’s not a true emergency – an important component to consider in designing a program.
  8. Flexibility to save enough for personal needs. A common rule of thumb is to have three to six month’s expenses saved for emergencies, but for those with near-term upcoming needs like medical leave or a wedding, more is needed. SECURE 2.0 savings accounts will be capped at $2,500, much below what many employees need for savings, so employers should also consider pairing the account with other savings options or more general purpose savings solutions.

Savings programs have great potential to improve Americans’ financial health. But in order to meet that potential, proper workplace adoption and implementation is needed. Not only is this important to employees, it can also serve as an important boost to companies’ ROI – particularly if combined with a holistic financial wellness strategy. With the link between financial health and productivity, retention, and more, driving increased emergency savings is a win-win for both employees and employers.

Sophie Raseman is Head of Financial Solutions at Brightside.

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