Umbrella protecting from rain Thevery existence of separate rainy-day accounts enforces disciplinein recognizing what savings can and can't do. (Image:Shutterstock)

|

People are having a tough time saving—for health care, forretirement, for emergencies—especially since so many are livingpaycheck to paycheck and bending under theweight of student debt, credit cards and other financialobligations.

|

Retirement in particular is endangered by employees' failure tosave, since in times of financial trouble they tend to turn totheir retirement accounts (if they have any) for a financialbailout. In fact, according to a study from the National Bureauof Economic Research, for every dollar that manages to make it intoa 401(k) or similar account, between thirty and forty cents "leaksout before retirement."

|

And that amount doesn't include loans people take to bailthemselves out that they actually manage to repay.

|

Related: 5 best, 5 worst metro areas for beefing up youremergency savings

|

However, says the report, employers can help thesituation—something they've expressed interest in as a way to boostemployee financial wellness—through providing a means ofsaving for the proverbial rainy day. The process can be costeffective, too, the report adds, and goes on to examine threedifferent options for doing so: after-tax employee 401(k) accounts,deemed Roth IRAs under a 401(k) plan and depository institutionaccounts.

|

Auto escalation of deposits into such accounts doesn'tnecessarily mean that people will lower their nonessentialconsumption to accommodate those deposits, the study found,although the "crowd-out effect" (outside spending that isn'treduced to make up for higher deductions) does exist—just not as ahuge influence on savings/spending.

|

But the very existence of separate rainy-day accounts, says thereport, enforces discipline in recognizing what savings can andcan't do. In addition, the separate account with that statedpurpose can help influence employees into not raiding those fundsfor other purposes.

|

The design of such accounts needs to incorporate certainfeatures into the structure of the account: liquidity, the taxtreatment of withdrawals, partitioning to encourage "separatemental accounting by employees" to discourage them from drainingthe accounts; auto enrollment; the ability to make matchingemployer contributions; satisfaction of compliance requirements;investment allocation; account portability; and what to do if theaccount's target balance is reached.

|

Read more: 

Complete your profile to continue reading and get FREE access to BenefitsPRO, part of your ALM digital membership.

  • Critical BenefitsPRO information including cutting edge post-reform success strategies, access to educational webcasts and videos, resources from industry leaders, and informative Newsletters.
  • Exclusive discounts on ALM, BenefitsPRO magazine and BenefitsPRO.com events
  • Access to other award-winning ALM websites including ThinkAdvisor.com and Law.com
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.