Helping employees set up an emergency fund

Your employee's water heater fails. Their car breaks down on the side of the road. Their spouse's company announces layoffs. Life is filled with challenges, and some are more stressful and expensive than others.

As a business owner, you've likely witnessed firsthand how financial emergencies can affect your employees. The stress doesn't stay at home. It can follow them to work and chip away at performance, attendance, and focus.

That's why an emergency savings fund, with enough money to cover at least a few months of expenses, is such an important part of your employees' overall financial picture.

Many people lack this critical safety net, but employers can encourage regular savings while also offering additional support, thanks in part to a provision in the SECURE 2.0 Act.

Because many people don't have enough saved to cover unexpected expenses. According to Bankrate's most recent emergency savings report, just 47% of Americans said they have enough access to funds to cover a $1,000 emergency expense.

When faced with an emergency, employees without an emergency fund may turn to credit cards, take a payday loan, or even raid their retirement savings, triggering early-withdrawal penalties and derailing their retirement savings progress. Having a solid emergency fund may help prevent employees from spiraling into a difficult financial predicament with wide-reaching implications.

Betterment's general guidance for savers, laid out in our guide to sizing up an emergency fund, comes down to three things:

1. Save at least three months of expenses

Employees supporting others with their income, working in volatile industries, or living with variable pay may want to aim higher. It ultimately comes down to what helps them sleep at night.

2. Pick a home for the money based on risk comfort

A low-risk, high-yield cash account may not always keep pace with inflation, but it carries no market risk. A bond-heavy investing account is better suited to keep up with inflation but is relatively riskier, which is why Betterment suggests that savers using one add a buffer to their target amount. Splitting an emergency fund between the two is an option as well. There's no single right answer, only trade-offs.

3. Make savings automatic

A regular, scheduled automatic deposit can help employees stick to their savings plan because it removes the recurring decision and the willpower out of the picture.

Some employees feel like they have to choose between building an emergency fund and saving in their workplace retirement plan. But the SECURE 2.0 Act created a new plan feature designed to help employees handle emergencies without derailing retirement:

The $1,000 emergency withdrawal

Employers can amend their plan to allow employees to withdraw up to $1,000 once per calendar year for personal or family emergency expenses, without the usual 10% early withdrawal penalty.

• Employees self-certify the emergency, and they generally can't take another $1,000 emergency withdrawal within three years unless they repay the first or make contributions covering it.
• Because this feature uses the plan's existing machinery rather than a separate account, it is generally easy for plan sponsors to adopt.

Remember, the $1,000 emergency withdrawal is an optional plan feature, and the details depend on your plan document and recordkeeper. If you're weighing either one, your plan provider can walk you through what adoption would look like.

With the right 401(k) provider, employees don't have to pick between paying for an emergency today and saving for tomorrow. The Betterment platform is built to help them plan for both:

• Easy emergency fund setup: Employees can create an emergency fund goal in minutes. If they're not sure how much to save, Betterment estimates a target for them based on their household income and their zip code's cost of living, then suggests a recurring deposit designed to help them work toward it.
• Linked accounts for big-picture planning: Employees can link outside savings accounts, investments, IRAs, and even a spouse's or partner's assets to see their 401(k) and emergency fund in one holistic view.
• Personalized advice and coaching: Personalized advice, plus optional financial coaching, can help your employees make strides toward their long- and short-term goals.

Ready to help your employees prepare for the inevitable and the unexpected? Check out Betterment at Work today.

Q: How much emergency savings should employees have?

Betterment generally suggests at least three months' worth of living expenses, and more for people who support others on their income, have unpredictable pay, or work in industries with shaky job security. Notably, nearly two-thirds of Americans say they'd need six months or more to feel comfortable.

Q: Can employees withdraw from a 401(k) for an emergency without a penalty?

Sometimes. If their employer's plan has adopted the SECURE 2.0 emergency expense provision, employees can withdraw up to $1,000 once per calendar year. This can be used for personal or family emergencies without the 10% early withdrawal penalty, though income taxes may still apply. Beyond the SECURE 2.0 emergency expense provision, and some other exceptions, early withdrawals generally trigger both taxes and penalties, which is exactly why a dedicated emergency fund matters.

Q: Should employees build an emergency fund before saving for retirement?

They don't have to choose. Many people work toward both at once, for example, by contributing enough to their 401(k) to capture any employer match while directing additional savings to an emergency fund. The right balance depends on each employee's situation, which is where personalized advice and financial coaching can help.