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Employers are less willing to combine 401(k) plans with emergency savings options for workers, according to a new survey.
A Vanguard report released this week found that starting in 2024, companies will be allowed to take $1,000 emergency withdrawals from their retirement savings and be allowed to offer emergency savings accounts linked to 401(k)s, but there is little adoption.
Vanguard analyzed 1,300 plans and found that only 4% of 401(k)s allow emergency withdrawals of $1,000. And emergency savings accounts linked to 401(k)s “earn minimal or no interest” from employers, the report said.
The options within these two plans were authorized under the retirement bill of 2022, known as the SECURE Act 2.0, amid growing concerns that Americans lack emergency savings.
Although the majority of employers do not offer 401(k)-linked accounts (technically known as pension-linked emergency savings accounts), some companies do offer outside emergency savings accounts, said Craig Copeland, director of benefits research at the Employee Benefits Research Institute. These external accounts are typically held at FDIC-insured banks, and after-tax contributions are made through payroll deductions.
Covering a $1,000 emergency is a challenge for many
Building and maintaining emergency savings can be difficult for many households, especially those struggling to maintain high living costs. Inflation has slowed to 2.4% annually since a peak of 9.1% in June 2022, but overall prices have increased by more than 25% since 2020, based on the Consumer Price Index.
Financial advisors typically recommend setting aside three to six months’ worth of living expenses as emergency savings.
But in December, only 47% of respondents said they had enough money to cover a $1,000 emergency expense, according to Bankrate’s annual emergency savings report released last week. Additionally, 29% said they have more credit card debt than emergency savings.
Employers’ concerns about their employees’ financial well-being reached a new high last year, according to a December EBRI survey. According to EBRI’s December survey, 48% rated their concerns as a 9 or 10 on a scale of 1 to 10, up from 43% in 2024 and 39% in 2023. In 2019, the year before the pandemic hit, that rate was 22%.
Contributions count toward 401(k) limits
Secure 2.0 created an emergency savings account linked to a pension as a “sidecar” to a 401(k). That is, they are established and maintained within the 401(k) plan itself. Best of all, your contributions are after-tax, treated as Roth contributions, and counted toward your 401(k) contribution limit. For 2026, that amount will be $24,500, with an additional $8,000 allowed for investors age 50 and older.
The bill sets a cap on annual contributions to emergency accounts at $2,500, adjusted for future inflation, and increased to $2,600 this year.
As for emergency 401(k) withdrawals of $1,000, most employers (94% in 2024) already allow workers to access their retirement savings if they are facing financial hardship, according to Vanguard.
“In many cases, we’ll be adding to what’s already being offered,” Copeland said.
Employers have largely avoided Secure 2.0 emergency savings provisions, but that may change over time.
“If a plan sponsor wants to pursue their own emergency savings program, they will analyze the options available to them, and some of that (analysis) will be the easiest to implement,” said Will Hansen, executive director of the American Council of Plan Sponsors.
“Withdrawing $1,000 is easier than[401(k)-linked accounts]and accounts that are not part of a plan can be an easy feature as well,” Hansen said.
One of the problems with 401(k)-linked accounts, among other administrative complexities, is that highly compensated employees (employees with incomes of $160,000 or more, as tested by the IRS) are not allowed to participate. Brandi Burrows, a partner at Hall Benefits Law in San Francisco, said this is an administrative challenge because a worker’s income can fluctuate, making it difficult for 401(k) plan record keepers to monitor.
A bipartisan bill introduced in the House and Senate in December would expand account eligibility. The measure, called the Emergency Savings Enhancement Act, would eliminate the exclusion for highly compensated employees and raise the annual contribution limit to $5,000.
“There’s nothing wrong with removing this exclusion and increasing the amount people can save,” Burrows said.
External accounts are “less complicated”
In the meantime, experts say employers are likely to continue partnering with outside companies that offer emergency savings accounts. According to a recent study by EBRI, 51% of companies with 500 or more employees offer some type of emergency funding. This also includes external savings accounts, which are not included in the data.
“If they propose it off the plan, it’s a no-brainer,” Copeland said. It’s “less complicated” than setting up an account within a 401(k) plan, he said.
Copeland said there’s also a liquidity issue with keeping emergency funds in a 401(k) plan. “If you’re off plan, it’s much easier to get the money right away, but it can take at least a few days to get off plan,” he said.
