Prudential surveyed more than 350 federal employeesand contractors after the shutdown. Half said they fell behind onbills. Even so, they were better equipped to weather a financialemergency than Americans in the private sector. (Photo:Shutterstock)

The close of the 13th annual America Saves Week presents a “goodopportunity” to step back and reflect on where policies arepromoting productive habits for Americans and the economy, andwhere they are not, says Phil Waldeck, president and CEO of PrudentialRetirement.

Innovations in 401(k) plan design, fostered by the PensionProtection Act of 2006, have clearly evolved retirement savings,says Waldeck.

But focusing policy on retirement savings provides only alimited context for measuring the country's personal financialhealth. “There are other barriers impacting Americans,” saidWaldeck. “Particularly when it comes to savings andemergencies.”

How unprepared are Americans to cover unexpectedfinancial shocks? Different answers are foundin different data sets.

The median savings account balance was $7,000, and the averagebalance $30,600, according to the 2016 Survey of Consumer Finances,conducted every three years by the Federal Reserve. That data ispulled from respondents that have active savings accounts.

Aggregate savings balances have grown considerably since thefinancial crisis, increasing 74 percent between 2009 and 2013, andreaching $9.2 trillion by June of 2018, or more than twice what itwas in 2008, according to Fed data.

While encouraging, that data is skewed by higher savings ratesof wealthy households, according to analysis by ValuePenguin, anonline clearinghouse for bank loans and financial serviceproducts.

“The growth in total savings was likely due to a few householdwith extremely high savings,” write analysts at ValuePenguin, whosay the Fed's data actually shows decreases in saving rates from aplurality of households.

A recent survey from gobankingrates.com found 58 percent ofrespondents have less than $1,000 saved; 26 percent has zerosavings.

Prudential's own data shows 63 percent of Americans don't havethe savings to cover a $500 emergency, with 25 percent spending allof their earnings, or more, every month.

Government shutdown underscores need for emergency savings

While data on paltry savings is commonly circulated in financialmedia—and is emerging as a talking point among Democrats vying forthe 2020 presidential nomination—Waldeck says the recent experienceof federal workers during the government shutdown is a wakeup call for thefinancial services industry, lawmakers, and savers.

In the aftermath of the 35-day partial shutdown, which impactedabout 800,000 workers, Prudential surveyed more than 350 federalemployees and contractors.

Half said they fell behind on bills; 27 percent missed amortgage or rent payment, 13 percent missed a student loan payment,and 10 percent missed a tuition payment.

Of those that had an emergency savings stash, 35 percent reducedor exhausted it; 42 percent used credit cards to cover costs; 26percent tapped retirement accounts, either through loans or earlywithdrawals.

Only 11 percent said household finances were not impacted. Morethan eight in 10 reported increased stress levels.

While real, the ramifications were relatively muted, asPrudential's survey shows federal workers were better equipped toweather a financial emergency than Americans in the privatesector.

Sixty-one percent went in to the shutdown with at least $1,000in emergency savings, compared to 46 percent of the generalpopulation that have as much, according to Prudential's data. Just11 percent of federal workers said they had no emergency savings,compared to 40 percent of the general population.

A  401(k) sleeve for emergencies

Employers' and industry's focus on bolstering retirement savingsis as commendable as it is necessary, but Waldeck says theexperience of the shutdown shows more focus is needed to address“insufficient resiliency and short term savings.”

Last year, Prudential—recordkeeper to more than 4,000 retirementplans—rolled out a new plan feature that allows sponsors to set upan after-tax emergency savings sleeve within existing 401(k)plans.

Contributions are segregated from general retirement savings andinvested in short-term, principal-preservinginvestments such as money-market funds. Withdrawals aresubject to a 10 percent tax on the investment earnings oncontributions.

A hypothetical $1,000 withdrawal from a low-yielding moneymarket fund would result in a minimal cost to savers relative towhat they would other wise pay from a bank loan or taking on creditcard debt to cover an emergency, said Waldeck.

“The opportunity here is to use the workplace and ease ofpayroll deductions,” he explained.

Last year, the Strengthening Financial Security ThroughShort-Term Savings Act was introduced in the Senate about the timePrudential rolled-out its new initiative.

That bill would amend ERISA to allow savings accounts astride401(k) plans. Savings accounts would not be allowed to exceed$10,000 and would be backed by the FDIC. Importantly, the billallows workers to be automatically defaulted into the plans.

Like the rest of retirement legislation in the 115th Congress,the bill stalled. Sen. Heidi Heitkamp, D-ND, who lost her seat inthe November election, sponsored the bill. Sen. Cory Booker, D-NJ,Sen. Todd Young, R-IN, and Sen. Tom Cotton, R-AR, wereco-sponsors.

Ideally, Prudential's savings option would be accommodated by anautomatic enrollment feature. That will take an act of Congress,but Waldeck said it was important to advance the optionirrespective of lawmakers' attention.

So far, sponsors have been receptive to the idea. Initialadoption of the rollout has been inline with Prudential'sexpectations, but it is still early in the learning curve, saidWaldeck.

“We're having a lot of conversations on emergency savings,” hesaid. “Employers care about the topic and are super engaged.

There are barriers. Plans would need an after-tax Roth option tobuild the savings sleeve. Sponsors would also have to invest ineducating workers. How a plan designs the employer match also hasto be considered, as does the prospect of after-tax contributionscannibalizing pre-tax retirement savings.

And if the feature is only used by highly compensated employees,sponsors could risk failing non-discrimination testing. Aworkaround could be making the option only available to non-highlycompensated workers, said Waldeck.

The feature also requires plan documents to be amended, a “timeand cost” barrier that Waldeck acknowledges. Plan providers couldgo a long way to helping sponsors navigate the barriers.Introducing the option during open enrollment for health plans orduring the holidays would be counter productive, he said.

An add-on to RESA

On Capitol Hill, more lawmakers are aware of the need to addressemergency savings gaps.

“There is a cohort that gets this and see it as a need forsociety,” said Waldeck. “Americans are vulnerable. The question iswhat can we do with policy to address that. The government shutdownwas a real wakeup call for people. We know what works, and that theworkplace can be an efficient starting point.”

Ideally, an amendment to the Retirement Enhancement and SavingsAct would include a provision to allow for automatic enrollment inemergency savings plans.

Then, of course, Congress would have to pass RESA.

“I'm hopeful this will be the year legislation happens,” saidWaldeck. “But I was saying that last year too.”

Waldeck says his guess is as good as anyone's as to whetherCongress will move on RESA.

“We just don't know. But sooner or later, we need RESA to bepassed,” added Waldeck.

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