Future of Financial Wellness: Employer-Sponsored Savings Programs

It is common, garden variety financial advice for households to save from three to six months worth of liquid, emergency funds. Unfortunately, it’s not all that common that people follow this advice, particularly households that could use it the most. This mistake has come glaringly into focus in the wake of the pandemic.

Today, too many workers live paycheck to paycheck. They have nothing to fall back on should they encounter a large expense, such as an auto repair, or lose their job due to a worldwide pandemic. While employers have gradually introduced financial wellness programs over the past ten years, the time is nigh for employer-sponsored savings programs to become a standard benefit. 

Interestingly, while many older workers have gradually accumulated assets over the years, there is no generation more acutely aware of their fragile financial status than Millennials. This largest living adult generation, currently in their mid-twenties to late-thirties, has already experienced three major financial setbacks: the market downturn following 9/11, the 2008 Great Recession, and now the economic decline caused by the coronavirus – which has obliterated the last five years’ worth of economic growth.

Many economists are predicting that COVID-19 is the last straw. A recent study revealed that 73 percent of young workers plan to alter their financial habits once we get past the COVID crisis. Millennials, in particular, will likely shift their focus from one of accumulating (possessions and investment earnings) to strict savings.

The Opportunity

Much as workers rely on their employers for income and healthcare insurance, many companies recognize the need for aggressive savings programs and are stepping up to meet that demand. An employee savings plan (ESP) is a pooled investment account sponsored by an organization that enables workers to save a portion of their wages for retirement or other long-term savings goals. While the most popular ESP is the 401(k) retirement plan, both workers and employers understand the need for a vehicle to address short-term savings needs.

Development Logistics

First and foremost, it is important for employers to understand their workforce demographics when developing a savings plan. Clearly, Millennials and Generation X have different financial priorities than Baby Boomers. Employers may want to consider surveying workers to get a picture of their goals, such as budgeting, saving, and paying off debt.

Next, an employer should consider its needs when selecting a savings plan provider, such as:

• How much it will cost to sponsor a program
• What ongoing support, including multimedia resources (e.g., online, video conferencing, podcasts, audio content, and toll-free contact centers) are available
• How it integrates with other financial wellness programs the employer provides
• How to communicate plan benefits and details
• How data, participation levels, and outcomes are measured and reported
• How are privacy requirements, cybersecurity and data protection needs addressed

Short-term ESPs are relatively new, but there are several ways one can be structured. The easiest way is to offer a split deposit to workers who receive their wages via direct deposit. This feature enables a worker to direct specific amounts from each paycheck to be automatically deposited between her checking and savings accounts. It can even be directed to accounts at different banks.

Another type of emergency cash account can be tacked onto a 401(k) plan. In this scenario, paycheck deferrals are automatically deducted and deposited into 401(k) funds on a pre-tax basis. However, a portion of the contribution is directed into a savings account, wherein workers may draw from it as necessary. However, note that the portion of withdrawals that represents earnings is subject to income taxes and penalties.

Rather than deal with the tax and penalty consequences of tying emergency savings to a retirement plan, it may be more efficient for employers to offer a payroll-deducted rainy-day savings program utilizing a more liquid savings vehicle. The most flexible plan would allow workers to start or stop saving at will.

Insights

Monitoring participation rates, utilization, and persistence rates is important. After all, the key to a savings program is to give workers a sense of security that comes with having a financial safety net. If workers sign up but do not contribute, or drop out of the program – that’s a sign that the program isn’t meeting their needs. Opting out temporarily due to a short-lived financial difficulty is different from dropping out because they can barely make ends meet. If many workers are experiencing long-term savings difficulties, it many be more useful to re-evaluate overall workforce compensation levels.

Also recognize that not everyone knows how to save money. They may overpay for basic household needs or not even realize how much of their income they spend superfluously every month. For this reason, a comprehensive financial wellness program should include budgeting tools and educational resources to help them maximize their savings efforts.

Once immediate needs are met and the savings habit is entrenched, employers are in a better position to emphasize the next level of financial goals, such as saving to buy a home or for retirement. This means a short-term savings program can help workers more fully appreciate and participate in a company-sponsored retirement plan.

Benefits

A sponsored savings plan not only helps workers, it also can provide benefits to the employer. Studies have shown that financial stress can have negative impact on worker productivity, engagement, and mental health.

In a recent survey, more than half (51 percent) of participants reported that their company financial wellness program enabled them to feel more engaged with their job; 40 percent felt they were more productive and focused; and 35 percent reported feeling less stressed. Building this goodwill internally can help an organization develop a positive reputation, which may lead to improved retention and recruitment.

The End Goal

Households that either lost a job or had hours reduced due to the economic decline now have a clear appreciation of what an emergency savings fund would mean to them – whether or not they actually had one. For many, that’s a key goal moving forward – so they are better prepared for the next financial crisis.

This demand creates a unique opportunity for forward-thinking employers looking to take their financial wellness efforts to the next level. In the wake of massive job losses, offering a short-term savings vehicle seems far more beneficial than pet insurance and breakroom pizza parties.

According to a recent PwC report, 78 percent of financially stressed workers indicate that they are attracted to companies that care for their financial well-being. Therefore, in the post-pandemic era that lies somewhere in the near future, industry experts believe that financial wellness benefits will become a key priority among employers.

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