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Provisions within the CARES Act allow for more immediate access to retirement funds, despite the financial drawback of tapping into these investments. Such provisions are necessary right now, as a majority of the country feels the financial impact of COVID-19: Unemployment is at a record high and many Americans do not have emergency savings to fall back on if their household income changes.

The legislation provides an option for recordkeepers to ease 401(k) borrowing restrictions for people impacted by COVID-19, increasing the amount they can borrow from $50,000 to $100,000 or their fully vested amount (whichever is less) and giving them an extra year to pay it back via paycheck reduction without tax penalty. The hardship withdrawal penalty of 10% for those under 59 ½ is eliminated, if the funds are paid back within three years.

Effective employer interventions for saving

The fact that millions of Americans may rely on retirement for emergency expenses should be of concern to employers, because we know that employees who are financially stressed tend to be less productive. On average, employees spend 13 hours per month worrying about money at work.

It's clear that employers have a vested interest in creating pathways to savings for their workers that allow them to avoid using their 401(k) plans as emergency savings. Our research has shown that a majority of employees would be motivated to save if their employees offered them tools to do so.

With this understanding, HR leaders are in a position to require such products from their recordkeepers.

A dearth of high quality, short-term savings solutions

The fact that 401(k)s have come to serve as de facto emergency funds is not a surprise to those of us studying emergency savings. Americans lack liquid savings even in the best of times: Before the pandemic, about 40% of people did not have the cash on hand to cover a $400 emergency, and up to 78% of people reported living paycheck-to-paycheck.

While tapping into retirement may ease the burden of a short-term financial crisis, it's important to look at the long-term negative effects on overall financial security and the looming distress as the person moves into retirement years, and should be a last resort.

A recent study from The National Endowment for Financial Education indicated that 9 in 10 people say COVID-19 is causing financial stress. The top worry was emergency savings, and 23% of people were concerned about having enough saved for retirement. The Employee Benefit Research Institute found that in 2019, 41% of households headed by a person aged 35 to 64 are projected to run out of money during retirement, and retirement withdrawals due to the pandemic are sure to worsen the situation.

Further, tapping into retirement right now exacts a great financial penalty: The current market volatility means people are selling off investments at the worst possible time. While temporarily waived right now, penalty fees for early 401(k) and IRA withdrawals cost Americans $5.7 billion in 2017 on top of the opportunity cost of using a long-term investment for a short-term expense.

But there is an opportunity to turn the tide, with the help of the right tools for saving.

We've learned from past downturns that saving increases during a recession, and current research is already demonstrating that lower-income people are beginning to save more even as the pandemic and resulting financial crisis is in process.

Providing people with access to tools that make saving easier can capitalize on this behavior.

The role of retirement plan recordkeepers

Retirement plan recordkeepers, driven by this demand from employers, can play a key role in enabling Americans to build liquid savings, reduce the need for hardship withdrawals and improve financial security.

Recordkeepers are seated in an ideal position to enable short-term savings through well-designed savings solutions.

For example, recordkeepers can offer a "sidecar" after-tax account within the retirement plan or a separate out-of-plan emergency savings solution via an associated financial wellness platform. The latter could encompass an array of options flexible to meet the needs of workers hoping to build a cushion for the unexpected.

Liquid savings options offered by recordkeepers can make it easy for employees to directly save money directly from their paychecks–a key element of success when it comes to emergency savings.

With emergency savings solutions, recordkeepers can meet employer demand for more holistic financial security offerings and improve participant engagement by upping interaction with their financial wellness platform. The framework for offering new products exists: Many recordkeepers provide options for student debt payments, for example.

As the CARES Act opens the floodgates on tapping into retirement savings, it's time for HR leaders to actively request new solutions for liquid savings from their retirement plan record keepers.

While easing restrictions through the CARES Act meets Americans' short-term needs–a necessary last resort–it also highlights the need for action from non-traditional actors like employers and retirement plan recordkeepers in building short-term financial security for all Americans.

Nick Maynard is a Senior Vice President for Commonwealth. Since joining, Nick has led initiatives improving marketing to LMI families, piloting prize-based savings in the credit union industry, and offering US Savings Bonds at tax time.  Currently, he concentrates on scaling our work around Prize-Linked Savings and gamification/games ("Financial Entertainment").