Financial wellness begins with an emergency savings account

One reality of financial wellness in America is that many families can’t afford an unexpected expense. Yet, shocks to our monthly budgets can happen at any time. As a result, many workers may be forced to use their 401(k) for short-term needs.

Financial wellness begins with emergency savings.

Twin crises: financial unwellness and retirement unreadiness

The need for emergency savings is clear:

  • Forty percent of people can’t afford a $400 emergency expense, such as a car repair or replacing a broken appliance, without borrowing.¹
  • Twelve percent are unable to meet an emergency expense by any means.²
  •  Almost one-third of adults are “either unable to pay their bills or are one modest setback away from hardship.”³

Some people are more vulnerable than others—unstable employment and relatively high indebtedness are among the best predictors of the inability to afford an emergency expense.⁴ When people need cash, they often have no place to turn other than their retirement savings.

401(k) plans aren’t emergency savings accounts

Although a 401(k) loan can make sense for some, they have major drawbacks:

  • Outstanding loan balances aren’t invested and, therefore, don’t generate earnings. 
  • Nearly half of borrowers stop contributing to their 401(k).⁵
  • Loan interest is taxed twice.⁶

And although they may be preferable to a high-interest loan from a bank or other lender, 401(k) loans can become a habit, threatening retirement security.

An emergency for the employer too

According to John Hancock’s 2019 annual financial stress survey, 40% of workers are distracted by financial matters. Financial stress harms productivity, hurting both employers and employees. Not having enough saved for retirement and for emergencies are the top two concerns among participants.

Financial stress leads to lower productivity, lower savings, and lack of emergency and retirement readiness, and it costs employers lost profits. The cycle is hard to break.

But the cycle can also work in reverse: Workers offered financial wellness assistance are less likely to be worried about their overall financial situation. They’re also less concerned about not having enough for an emergency or for retirement, or about losing their job. 

Breaking the cycle 

Retirement plan sponsors and their business partners recognize this and are making emergency expense planning part of financial wellness programs.

Just as your benefits program helps employees plan for health emergencies, there are tools that can help them handle financial emergencies. Having an emergency savings account can  help make your 401(k) plan more effective over the long term.

Financial representatives and sponsors should consider emergency savings programs with
these features:

Expense calculator—Common emergency expenses should be suggested and quantified.

Savings planner—The funding of potential outlays should be scheduled and routine, allowing participants to save gradually up to a goal amount.

Automatic transfers—Consider partnering with a service provider that offers systematic electronic transfers from an outside bank account to an FDIC-insured, low- or no-fee emergency savings account linked to the participant’s 401(k) homepage.

Helping improve financial wellness

Employees who have built up emergency savings are better equipped to contribute to their 401(k) plan, and less likely to tap the plan for loans—and that’s good for both employee financial wellness and overall plan health. Recognizing this, some plan sponsors are looking to their business partners—such as financial representatives and recordkeepers—for help.

Innovative business partners recognize that an emergency savings account should be accessible, goal based, and automatic—and they recognize that employees need help planning for emergency expenses.

1,2,3 “Report on the Economic Well-Being of U.S. Households in 2018,” Board of Governors of the Federal Reserve System, May 2019.
4 “Why are so Many Households Unable to Cover a $400 Unexpected Expense?” Anqi Chen, Center for Retirement Research at Boston College, July 2019.
5 John Hancock internal data as of 2017.                                                                                      6 John Hancock internal data as of 7/31/2019.  
 

 

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. John Hancock does not provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made here.

John Hancock Retirement Plan Services, LLC offers administrative or recordkeeping services to sponsors and administrators of retirement plans.  John Hancock Trust Company LLC provides trust and custodial services to such plans.

Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, New York.  Product features and availability may differ by state.

John Hancock Retirement Plan Services, LLC, John Hancock Life Insurance Company (U.S.A.) and John Hancock Life Insurance Company of New York each make available a platform of investment alternatives to sponsors or administrators of retirement plans without regard to the individualized needs of any plan.  Unless otherwise specifically stated in writing, each such company does not, and is not undertaking to, provide impartial investment advice or give advice in a fiduciary capacity. 

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Sosseh Malkhassian

Sosseh Malkhassian, 

Head of Participant Solutions

John Hancock Retirement

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