PLANSPONSOR - December 2017/January 2018 - 16

Upfront
'AutoEnrolling'
Emergency
Savings
PLANSPONSOR
attended
an industry
trends webcast hosted by J.P. Morgan
Asset Management, in part to speak with
presenters such as Ida Radamacher of
the Aspen Institute Financial Security
Program. Radamacher's commentary drew
on lessons learned from April's inaugural
Aspen Leadership Forum on Retirement
Savings, held in Middleburg, Virginia.
The forum brought together roughly 60
senior leaders from industry, government,
academia and the lobbying community to
discuss " breakthrough solutions to one
of the most critical financial challenges
facing American households-the lack of
adequate savings for retirement. "
David Mitchell, senior program
manager for the Financial Security
Program (FSP) at the Aspen Institute,
wrote a summary of the event, drawing
on his experience as a legislative aide to
U.S. Senator Sherrod Brown, D-Ohio.
According to Mitchell and Radamacher,
many attendees felt that a crucial but
overlooked challenge affecting the retirement
savings efforts of numerous U.S.
workers is the widespread occurrence of
unanticipated financial shocks-ranging
from pay cuts to trips to the emergency
room, to spousal separation, major car or
home repairs or to other large nonrecurring
expenses.
Radamacher cited data from The
Pew Charitable Trusts noting that 60%
of American families experienced one of
these events in just the past 12 months.
Also, according to data from Prosperity
Now, 44% of households put no money
toward emergency savings in the past year.
" It is not surprising that many
families are forced to tap long-term assets,
especially retirement accounts, to deal
with income volatility and other shortterm
financial hardships, " Radamacher
observed. " The data shows one in four
people with a defined contribution [DC]
plan will use all or some of their savings
for non-retirement purposes, whether
that is for paying a bill, buying a home,
dealing with a medical emergency or
sending a child to an expensive college. "
The two suggested that a way to
help families cope is to link a short-term
emergency savings, or " sidecar, " account
to a traditional retirement account. They
argued that such an approach helps savers
think about their financial picture holistically-and
understand the importance of
protecting tax-advantaged investments as
time goes by. The linking of the retirement
savings and emergency savings accounts
must be substantial and designed with
choice architecture in mind, but it can be
very powerful, the pair said.
Mitchell explained the mechanics:
" The idea is relatively simple. Workers
who do not yet have emergency savings
[would] be directed to first fund a
16 PLANSPONSOR.com December 2017-January 2018
Art by Hye Jin Chung
short-term savings account reserved for
emergencies. Once a sufficient savings
buffer [was] built up, additional contributions
[would] be diverted to a traditional,
less-liquid retirement account. "
The short-term account would again be
automatically prioritized, in the event the
original buffer was spent down.
" By formalizing the dual role the
retirement system currently plays, savers
would be in a better position to distinguish
between and maximize what is
available now and what is locked away
for retirement, " Mitchell says. The two
were relatively agnostic about the specific
details of the sidecar accounts.
As Radamacher laid out, key questions
include determining which institutions
should provide what service; how the
accounts should be structured for fiduciary
liability and tax purposes; at what deferral
level participants should be automatically
enrolled; exactly how large of a balance
should accumulate in the buffer account
before the shift to retirement savings;
and, finally, what withdrawal restrictions
should be placed on the two accounts.
-John Manganaro
http://www.PLANSPONSOR.com
PLANSPONSOR - December 2017/January 2018

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