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Momentum is building behind the concept that Americans should have access to emergency savings accounts to keep them from dipping into retirement savings when they need cash fast.
Prudential Financial Inc. recently rolled out an emergency savings product for employers that uses after-tax contributions workers make to their retirement plans to build up a personal savings reserve. Prudential’s announcement comes at a time when several bipartisan efforts are underway in Congress to tackle retirement issues during the next round of tax reform.
Prudential’s program is designed to dissuade savers from using their retirement funds. Hardship withdrawals from a retirement account—an alternative for those who can’t come up with money in a crisis—are subject to income tax and sometimes withdrawal penalties.
“An emergency savings buffer enables people to stay the course,” Phil Waldeck, president of Prudential Retirement, told Bloomberg Law. Research suggests most Americans “couldn’t handle a $500 hit” in the event of an emergency, he said.
A bipartisan bill introduced by Sen. Heidi Heitkamp (D-N.D.) aims to do something similar.
Strengthening Financial Security Through Short-Term Savings Act (S. 3218) would allow employers to offer stand-alone short-term savings accounts for financial emergencies. The accounts would automatically deduct contributions from employees’ paychecks, reducing retirement saving leakage. Leakage occurs when employees tap into their retirement accounts without replenishing their savings.
The bill was one of three retirement-related savings bills introduced in mid-July by Heitkamp, Sen. Cory Booker (D-N.J.), Sen. Tom Cotton (R-Ark.), and Sen. Todd Young (R-Ind.).
A similar idea emerged as part of the Republican-led “Tax Reform 2.0.”
House Ways and Means Committee Chairman Kevin Brady (R-Texas) included universal savings accounts in an outline for the second round of tax cuts. Universal savings accounts, or USAs, are a concept like emergency savings that build a savings account with the same tax advantages as retirement savings accounts.
“There is a need for greater savings in both the short-term and the long-term,” Waldeck said. Prudential supports Heitkamp’s bill, he said, and would support a similar provision if it is tied to something like Tax 2.0 or retirement legislation like the Retirement Enhancement and Savings Act—parts of which Brady said he plans to add to the tax bill.
Waldeck said clients have already shown interest in the accounts.
The fact that Prudential is involved is significant because of its history of innovation in the retirement space, Mark Iwry, a former Treasury Department, told Bloomberg Law. Iwry is now a nonresident senior fellow in economic studies at the Brookings Institution.
Iwry helped author a report on saving solutions for the nonprofit advocacy group Prosperity Now—a group Prudential worked with in its decision to develop this latest savings product. He also advised Heitkamp’s office on the design of her bill.
“Facilitating emergency saving is continuing to gather interest. I think we’re on to something good that could really help people,” Iwry said. “The next step is experimenting to determine the most effective ways to design this.”
Iwry is part of a group that’s researching emergency savings and is looking for businesses that might want to offer the accounts.
Stand-alone accounts held in a bank or credit union, and tax-favored accounts related or attached to a 401(k), are two options being explored, Iwry said.
The group hasn’t yet had an employer volunteer get involved in the research but Iwry said “multiple stakeholders are interested.”
The other researchers on the study are David Laibson, an economics professor at Harvard; Brigitte C. Madrian, a public policy and corporate management professor at Harvard; David John, a senior strategic policy adviser at the AARP Public Policy Institute; James J. Choi, a finance professor at Yale; and John Beshears, an associate professor at Harvard.
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