Twin crises: financial unwellness and retirement unreadiness
The need for emergency savings is clear1:
- 40% of people can’t afford a $400 emergency expense, such as a car repair or replacing a broken appliance, without borrowing.
- 12% are unable to meet an emergency expense by any means.
- Almost one-third of adults are “either unable to pay their bills or are one modest setback away from hardship.”
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.2 When people need cash, they often have no place to turn other than their retirement savings.
401(k) plans are not emergency savings accounts
Although 401(k) loans 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)s.3
- Loan interest is taxed twice.4
While 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 professionals 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 up gradually 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 professionals 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 “Report on the Economic Well-Being of U.S. Households in 2018,” Board of Governors of the Federal Reserve System, May 2019. 2 “Why Are So Many Households Unable to Cover a $400 Unexpected Expense?” Center for Retirement Research at Boston College, July 2019. 3 John Hancock internal data, as of 2017. 4 John Hancock internal data, as of 7/31/19.
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.
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