401(k)s Have Leeway Investing Pension-Linked Emergency Savings

Retirement plans will have discretion over how they invest newly authorized plan-linked emergency savings accounts created under a sweeping 2022 benefits law, according to new US Labor Department guidance.

DOL’s Employee Benefits Security Administration issued a frequently-asked questions document Wednesday that outlines the eligibility, contributions, administration, and investments permissible under new pension-linked emergency savings accounts, or PLESAs.

Regulators’ hands-off approach on PLESA investments provides a pathway for insurance companies and retirement plan recordkeepers to market new products and capture a larger share of the lucrative 401(k) market.

The SECURE 2.0 Act (Pub. L. No. 117-328) Congress passed in December 2022 allows employers to help workers who don’t qualify as “highly compensated” to save for a rainy day by contributing up to $2,500 eligible for matching into a liquid sidecar savings account directly tied to their 401(k), 403(b), or 457(b) governmental plans.

Under the law, PLESA contributions must be held in cash, interest-bearing deposits, or investments that maintain the principal and provide a “reasonable rate of return.”

EBSA’s guidance permits “any prudent investment product that satisfies” the law, “regardless of the type of financial institution that issues or underwrites the investment product, the industry in which the institution operates, or the principal regulators of the investment product or its issuer or underwriter.”

The agency’s focus is “capital preservation and liquidity consistent with immediate access to savings to respond to unexpected financial needs,” the guidance said.

DOL’s guidance also clears the way for automatic PLESA enrollment and prohibits account minimums. The FAQ leaves up to employers whether they include earnings in the $2,500 account balance limit.

Reasonable administration fees and expenses may be charged, pursuant to fiduciary standards of care under federal benefits laws, and participants don’t have to certify the existence of an emergency to withdraw funds, according to the guidance.

EBSA said it is working on adding PLESA features to its annual Form 5500 disclosures health and retirement plans are required to file annually.

The IRS issued its own PLESA guidance Jan. 12 that outlines what steps are too far for plans to prevent workers from abusing emergency savings sidecar accounts by making excessive withdrawals designed to maximize employer matches.

The service guidance explicitly prohibited plans from forfeiting their matching contributions, suspending participant contributions to their emergency savings accounts, or suspending matching of participant contributions to their underlying retirement plans.