Rainy Day Savings Accounts: An Innovative Approach to Help Workers Weather Financial Emergencies

By Joanna Ain

We all know that financial emergencies happen to everyone, whether it’s a job loss, an unexpected medical procedure or a car breaking down. But these shocks are most destructive to low-income households. According to the Federal Reserve, two out of every five Americans don’t have $400 to deal with financial shocks without selling something or borrowing money.

Without that buffer of emergency savings, many Americans turn to predatory payday loans, spending an average of $520 in interest to borrow the average loan of $375. And with no short-term savings, it’s difficult for households to begin putting away money for long-term needs, such as retirement.

Simply put, we need to help U.S. households save for now and for later. And the workplace is just the spot to provide that solution.

To that end, Prosperity Now is pleased to release a new report, Saving for Now & Saving for Later: Rainy Day Savings Accounts to Boost Low-Wage Workers’ Financial Security. Co-authored by J. Mark Iwry, Nonresident Senior Fellow at the Brookings Institution and Visiting Scholar at the University of Pennsylvania’s Wharton School, this report discusses the void of emergency savings across the country and an innovative solution: rainy day savings accounts in the workplace.

Inadequate savings can affect workers both personally and professionally. A lack of savings can easily lead to financial stress — wreaking havoc upon mental and physical health. This stress inevitably spills over to the workplace. Aon Hewitt reports that almost half of workers spend time at work dealing with personal finance issues. Financial stress leads to lower productivity and places businesses in the difficult position of having a workforce distracted by their tumultuous financial lives.

Employers know that to have a healthy, productive workforce, they need to help their workers save. And many do just that: over half of Americans save for retirement through an employer-sponsored retirement plan. But workers still need a way to save not just for retirement, but also for emergencies. For short-terms savings, some workers make early withdrawals from retirement accounts and these can comprise 30%-40% of annual contributions. This reduces the savings available for the long-term, leading workers to postpone retirement, which can be problematic for both employers and workers.

Here’s where rainy day savings accounts come in. These accounts pair retirement savings vehicles in the workplace side-by-side with an emergency savings vehicle. This means that employers can use infrastructure that is already in place for workers to save for retirement and give workers the option to also save for emergencies.

There are three basic short-term/long-term savings models out there (though other approaches, like combining features of these models, are also possible). While the first two models need the 401(k), the last approach can be implemented without the worker having a retirement plan (see our report for more detail on the benefits and drawbacks of each model):

• Rainy Day Savings Account Within the 401(k): uses after-tax contributions to the 401(k)-type retirement saving plan as a separate emergency savings account within the plan, coordinated with the plan’s pre-tax contribution account.
• Rainy Day Savings Account Alongside the 401(k): uses a “deemed” or “sidecar” Roth IRA as a separate emergency savings account attached to the 401(k)-type retirement saving plan.
• Rainy Day Savings Account Separate from Any 401(k): uses a savings account or a payroll or prepaid card, provided in either case by a bank or credit union, separate from and unrelated to any retirement plan the employer might offer.

Workplace financial wellness programs have been gaining traction in the hopes of lessening financial stress and increasing productivity in the workplace. Employers can use this increasing momentum to implement these rainy day savings accounts immediately, without any major policy action needed. However, to help scale rainy day savings accounts and savings in general, federal policies can promote these accounts as well as encourage savings more broadly. While we discuss these policies (and others) in depth in Saving for Now & Saving for Later, here are a few examples:

• Emergency savings accounts are already available and allowable under current law, but guidance is needed to clarify how financial institutions and employers can offer and adopt them. By raising awareness of and promoting rainy day savings accounts, the federal government can benefit both workers and their employers.
• Savings penalties — otherwise known as asset limits — can force families to choose between saving for their futures and receiving supports for nutrition, heat and other basic needs. Congress should allow families to save for retirement and emergencies without losing access to public benefits like SNAP, TANF, Medicaid, LIHEAP and SSI.
• A third of all American workers do not have a way to save for retirement through the workplace. Enacting a national Auto-IRA program can give tens of millions of low- and moderate-income workers the ability to save for their retirement.

With short- and long-term savings, workers can more easily navigate financial emergencies and save for long-term goals while their employers can potentially benefit from a more focused and productive workforce. Read our report for more on rainy day savings accounts and how they can help workers save for now and save for later.

Joanna Ain is a Senior Policy Manager at Prosperity Now.