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Cash crisis: Why employers need to take employee emergency savings seriously

Employees lack emergency savings. Here’s why that’s a problem for employers

Everyone knows they should have emergency savings for a rainy day. But when that rainy day finally comes, it can feel more like a typhoon for cash-strapped American workers. All too often, an unexpected expense like a car repair, a leaky hot water tank or a broken leg can send a person spiraling into debt, causing untold stress and panic that trickles down into the workplace.

That’s because many American workers have little to no cushion when it comes to emergency savings. According to a report by the Federal Reserve, nearly three in ten adults are either unable to pay their monthly bills or are one minor financial setback away from failing to pay their monthly bills in full. In fact, 37% said they don’t have enough cash to cover an unexpected $400 expense.1 And this was before COVID-19 plunged the world into financial chaos.

Since then, a sobering 19% of adults have reported losing a job, being furloughed, or having their hours reduced due to the pandemic.2 At the same time, employees have been at the mercy of lockdown restrictions that closed or narrowed much of the economy. Together these two key factors have made it difficult for many to predict when they would be able to go back to work or how long they need to make their savings last.

While the implications of a lack of emergency savings have become even more pronounced during COVID-19 for employees, it impacts employers as well. Here’s why.

Their stress is your bottom line

When the unexpected happens, an employee with an emergency fund can simply tap their savings, pay for it and move on. But if that employee doesn’t have emergency savings, it can begin a cycle of financial stress that will impact their productivity and cause downward pressure on your bottom line.

For instance, they may have to spend their working hours on the phone or out of the office as they deal with creditors, apply for loans or ask family members for financial assistance. In fact, 47% of employees report financial issues have been a distraction at work.3

 

 

 

Even if employees deal with the problem on their own time, the stress can still affect their work quality, as 21% of employees admit financial worries impact their productivity.4

Depending on the expense, the issue may even impact their ability to work at all. For example, an employee with a broken car may be unable to make it to the office, while an employee who has to skip rent to pay a medical bill may face eviction and housing instability. Should their financial issues become dire enough, the employee might have to take a second job.

The message is simple: the more you help your employees manage their financial stress by encouraging emergency savings and offering access to financial wellness solutions, the more your employees can give their full attention to their work.

Is a lack of emergency savings placing your employees’ retirement at risk?

When an emergency strikes, employees often look to their retirement plans if they don’t have other savings options. For instance, amid the COVID crisis, 17% of savers requested coronavirus-related distributions. And among a subset of those savers, 4% of those that took emergency plan distributions withdrew $100,000, which was the maximum.5

Certainly, retirement plans offer a tempting solution to an immediate emergency, but using these funds can place employees’ futures in peril. That’s why—pre-COVID—government regulations and plan sponsors included tax penalties and restrictions to deter savers from tapping into their hard-earned retirement nest eggs.

Employees that do make emergency withdrawals may find it impossible to recoup the principal plus the returns they would have achieved had they stayed invested. This can delay an employee’s retirement by years or even indefinitely, depending on how challenging it is to resume methodical savings and make up for the money withdrawn.

This not only impacts their retirement future, but it can have an impact on your bottom line and lead to:

  • Higher healthcare costs to insure an older workforce.
  • Higher labor costs associated with employing older, higher-paid workers.
  • A lopsided talent funnel that relies too heavily on more experienced employees. This can lead to the loss of emerging talent as younger, qualified employees become frustrated and leave the organization due to the lack of opportunity.

In total, an employee who delays retirement by just three years can end up costing the employer $51,000 in additional benefits and salary.6

 

 

 

Supporting financial wellness is good for business

When you support your employees in developing their emergency savings, you can improve their overall financial wellness, thus reducing stress and improving productivity. One way you can help your employees with emergency savings is by offering a financial wellness program. Financial wellness provides valuable benefits for your workforce, as 71% of employees say they’ve utilized personal finance services provided to them by their employer.7 This benefit can also help you retain employees and hire top talent, with 62% of employees saying they would be more attracted to another company that cares more about their financial well-being.8

Saving for medical emergencies with Health Savings Accounts

Health Savings Accounts (HSA) provide another solution and relevant safety net for employees who may struggle with emergency savings. For instance, 20% of adults in 2018 had an unexpected medical emergency, with a median cost of $1,000. By the end of the year, 40% of those still had debt from the unplanned expense.9 An HSA can help employees navigate medical emergencies, by providing a specific account that enables them to save and pay for medical expenses tax-free. The money in the account is owned by the employee, and employees can use the funds for designated medical costs.

Emergencies are unfortunately a part of life. That’s why emergency savings should be as well. The ability to access funds in the event of unplanned expenses, without going into debt or impacting retirement, is essential to employee financial wellness—and your organization’s performance.

Voya’s Financial Wellness Assessment can help your employees understand the importance of building an emergency fund and other actions to improve financial wellness. Learn more about Voya’s full suite of financial wellness capabilities.

 

 

Report on Economic Well-Being of U.S. Households in 2019, Federal Reserve, May 2020

Report on Economic Well-Being of U.S. Households in 2019, Federal Reserve, May 2020

3 PWC Employee Financial Wellness Survey, 2019 4. PWC Employee Financial Wellness Survey, 2018

4 PWC Employee Financial Wellness Survey, 2018

Here’s How Many People Withdrew $100,000 from their 401(k) Accounts Due to Coronavirus, CNBC, July 27, 2020

6 Voya Internal Data. Assumptions: An incremental aggregate cost of $51,000 for every individual whose retirement is delayed by three years. This cost is estimated assuming that a 65-year-old employee is not replaced by a mid-career employee for three additional years, and assumes a flat 31% cost of benefits as per Bureau of Labor average (https://www.bls.gov/news.release/ pdf/ecec.pdf).

7 PWC Employee Financial Wellness Survey, 2018

8 PWC Employee Financial Wellness Survey, 2019

Report on Economic Well-Being of U.S. Households in 2018, Federal Reserve, May 2020


Disclosures: 
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision. Health Savings Accounts offered by Voya Benefits Company, LLC (in New York, doing business as Voya BC, LLC). Administration services provided by WEX Health, Inc., and Benefit Strategies, LLC. Investments are not FDIC Insured, are not guaranteed by Voya Benefits Company, LLC (in New York, doing business as Voya BC, LLC), and may lose value. All investing involves risks of fluctuating prices and the uncertainties of return and yield inherent in investing. All security transactions involve substantial risk of loss.
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