Building Emergency Savings through Employer-Sponsored Rainy-Day Savings Accounts

John Beshears, James J. Choi, J. Mark Iwry, David C. John, David Laibson, Brigitte C. Madrian

Chapter in NBER book Tax Policy and the Economy, Volume 34 (2020), Robert A. Moffitt, editor
Conference held September 26, 2019
Published in June 2020 by University of Chicago Press
© 2020 by the National Bureau of Economic Research
in The Tax Policy and the Economy Series

Roughly half of Americans live paycheck to paycheck. When financial shocks occur during their working lives, many of these households tap their retirement savings accounts. We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent preretirement needs arise. In particular, we consider plans that would allow employers to automatically enroll workers into an employer-sponsored payroll deduction “rainy-day” or “emergency” savings account.

Having separate rainy-day and retirement savings accounts can facilitate greater saving for short- and long-term purposes by helping to psychologically segregate and catalyze these two motives to save. Auto-features and mental accounting can be jointly deployed to reduce the frequency with which short-term needs crowd out long-run retirement savings.

We describe three specific implementation options: (a) after-tax employee 401(k) accounts, (b) deemed Roth individual retirement accounts (Roth IRAs) under a 401(k) plan, and (c) depository institution accounts. We present pros and cons of each approach, given the existing regulatory regime, relative to the following criteria: the ability to automatically enroll employees into the rainy-day account; the targeted size of the rainy-day account; the investment allocation used for the rainy-day account; the fees and expenses associated with setting up and administering the rainy-day account; employers’ ability to match employee contributions to the rainy-day account and the destination of those matching contributions; the ability of the rainy-day account to provide liquidity when the funds are needed; the tax treatment of contributions to, earnings in, and withdrawals from the rainy-day account; the portability of account balances when employees separate from a sponsoring employer; and compliance and potential interactions with the nondiscrimination rules that apply to tax-qualified employer-sponsored plans.

We conclude that each of the three implementation options merits exploration and field testing.

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Document Object Identifier (DOI): 10.1086/708170