By David Newville and David S. Mitchell
Note: This piece was written as a collaboration between Prosperity Now and the Aspen Institute.
In the wake of the passage of the Republican tax bill, which provides a hefty windfall to American corporations, several companies have announced one-time bonuses for some employees. Bonuses can certainly help employees financially, but a one-time bonus is like an infusion of sugar into the bloodstream. It helps workers temporarily cover the bills or start to pay down a debt, but it doesn’t really help them stabilize their long-term financial outlook.
That’s a shame, because the economic outlook of the businesses they work for are certainly looking rosy. By standard measures, the economy is doing quite well right now. GDP growth is hovering around three percent, and the stock market, despite some recent bumps in the road, has reached historic levels. Meanwhile, unemployment is at a 17-year low.
Despite this, millions of working Americans are still regularly struggling to make ends meet. According to a survey by the Federal Reserve, almost half of Americans cannot come up with $400 without borrowing to cover an emergency. For these households, an unexpected bill or loss of income can wreak havoc on their finances and their lives.
One promising new approach to this problem starts in a very familiar place: the good old company 401(k) plan. Millions of workers are enrolled or have access to a workplace-based retirement plan, such as a 401(k) or 403(b). It’s one of the primary ways that many workers in our country currently save and build wealth.
While these retirement plans are an essential benefit of employment, it’s hard for many workers to prioritize retirement savings when more immediate financial needs feel so pressing. As a result, many workers with access to a plan don’t participate, and those who do often take out early withdrawals or loans that can come with steep penalties and tax consequences.
But what if you could design a workplace savings plan that helps workers set aside funds for both short and long term financial needs? Such a system isn’t unfathomable; all the important features of a workplace-based retirement savings plan could in theory be applied to an employer-sponsored emergency savings plan. Payroll deduction for contributions, automatic account opening, employer matches, assistance from human resources staff with questions, and even tax incentives for employers that offer them are well within the realm of possibility, and could create a valuable vehicle for emergency savings. Several organizations (including our own) are exploring ways to implement such an innovation, and employers should follow suit.
Technically, under current law, employers can already facilitate short-term savings within a 401(k) plan. They can create a separate balance within the plan specifically earmarked for liquid savings, funded by after-tax contributions and invested in something safe and stable. At the same time, the retirement balance remains untouched, growing into the nest egg that we’ll all need in our golden years. This isn’t the only way to structure this rainy-day account, and we’re not wed to any one approach. For us, the key is leveraging the established retirement savings infrastructure and the proven behavioral economic principles behind it to help workers save for now and for later — for both emergencies and retirement — simultaneously and seamlessly.
The benefits of these accounts will not accrue just to employees and their families. According to research from PwC, 53 percent of employees reported being stressed about their finances, and Aon Hewitt found that almost half of workers spend time at work dealing with personal finance issues. Stated simply, financial worries are limiting productivity in the workplace. If employees are more financially secure, they can spend less time focusing on their finances and more time focusing on their work, which positively impacts a business’s bottom line.
Some major employers have already begun to look beyond modest, one-time bonuses to help improve workers’ financial security. For example, Wal-Mart recently launched a new program to help their workers gain access to some of their earned pay before payday when they are short on cash or an unexpected expense arises. Pitt Ohio, a Pittsburgh trucking company, and SunTrust Banks are paying their workers extra if they make regular contributions to an emergency savings account. Leveraging the advantages of a workplace retirement savings program to facilitate emergency savings could have a major impact as well.
Corporations considering how to spend their recent tax windfall should consider long-term investments in their workers’ financial health to supplement the one-time bonuses currently being offered. Adopting a rainy-day savings account that works hand-in-glove with the existing 401(k) system is one great option. Doing so will not just help employees cope with emergencies and build economic security, but could also boost businesses’ bottom lines. With large numbers of American workers already on shaky financial ground despite a healthy economy, U.S. companies need to step up to make sure their employees don’t fall even further behind.
David Newville is director of federal policy for Prosperity Now. David S. Mitchell is senior program manager for the Financial Security Program at the Aspen Institute.