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Rainy-Day Proposal Omission Reignites Retirement Link Debate

April 7, 2022, 9:30 AM

Easy and early access to retirement funds is at the center of a simmering debate that was rekindled when key emergency savings proposals were left out of bipartisan legislation that recently passed the House by an overwhelming majority.

The House passed the SECURE Act 2.0 (H.R. 2954) 414-5 late last month, setting the stage for the Senate to take up the bill. The measure would require retirement plan sponsors to automatically enroll participants and boost the age participants are required to withdraw their savings.

But absent from the House version of the package were any proposals to improve access to emergency savings accounts, a policy objective industry observers say is crucial to addressing U.S. retirement security.

“When people have unexpected expenses, they need a source of financial liquidity,” said Karen Andres, director of the Retirement Savings Initiative at the Aspen Institute. “I don’t think anybody wants to see retirement savings leak out in the form of emergency savings, and that’s why we see that critical connection with emergency savings and retirement security.”

Policy advocates disagree on how closely the link between retirement savings and emergency funding should be. Andres said she supports multiple solutions for equipping workers with rainy day funds, but there’s a line of liquidity in 401(k)s that, if crossed, could hurt workers’ long-term savings objectives.

Retirement Ties

Multiple emergency savings proposals are on the table for contention in the SECURE Act 2.0 as the Senate takes up the bill, legislative aides told Bloomberg Law. The Senate version is expected to largely mirror the House bill but go further by including emergency savings proposals, according to an aide for Sen. Michael Bennet (D-Colo.)

The Enhancing Emergency and Retirement Savings Act (S. 1870), which Bennet and Sen. James Lankford (R-Okla.) sponsored last year, is one of the main proposals under consideration.

The bill would modify the federal tax code to permit workers to withdraw vested amounts of up to $1,000 a year to cover short-term emergency costs without facing steep IRS tax penalties for early distributions.

“Families across Colorado and the country are working incredibly hard, but still can’t afford the rising costs of housing, health care, and child care—and as a result, find themselves one emergency away from everything falling apart,” Bennet said in a statement provided to Bloomberg Law. “My bill with Sen. Lankford will give working families the security and flexibility they need to stay afloat when the unexpected happens and make it easier to save for retirement.”

Nine in 10 financial professionals support adding emergency savings to the House Secure Act 2.0 bill, according to the Nationwide Retirement Institute, a project of Nationwide Mutual Insurance Co.

The Covid-19 pandemic laid bare financial insecurity and forced millions of Americans to draw down on their retirement savings to cover unexpected costs, said John Carter, president and chief operating officer of Nationwide’s financial division.

“The hoops participants have to jump through to borrow from their 401(k)s is cumbersome,” Carter said. “The Lankford-Bennet bill would simplify that.”

Liquidity within 401(k) savings is a key contributor to ensuring more Americans save for retirement in the first place, he added. The two are inextricably linked, as fewer workers will save if they fear their money will remain tied up until retirement, he said.

Plan Leakage

But locking up funds for the long term is precisely what retirement saving is all about, said Joshua Gotbaum, a guest scholar for economic studies at the Brookings Institution. Behavioral science indicates that workers are more likely to leave their retirement savings untouched if they have a separate vehicle for emergency savings.

“As companies got out of traditional pension plans, which you can’t withdraw from, there’s been this rising tension about whether we want to let people take money out of their 401(k)s, and whether if we don’t let people take money out if they’ll ever put money in at all,” Gotbaum said. “Having two separate funds gives workers the choice.”

There are already in-plan retirement products that offer employees an emergency savings vehicle as a sidecar to their existing retirement plan: after-tax contributions to a traditional 401(k) plan or Roth individual retirement accounts. Those products are attractive because federal regulators treat them like retirement plans, so employers can automatically enroll workers and encourage emergency savings.

Eight of the nine largest record-keeping companies in the U.S. have either recently introduced or are planning to roll out emergency savings products, according to a 2021 Commonwealth Financial Network survey.

MarylandSaves, a state-based auto-IRA program, is implementing its own sidecar emergency savings program. Gotbaum, who serves on the MarylandSaves board, said it’s a more expensive option for employers but ensures long-term retirement security, which is ultimately the purpose of the SECURE Act 2.0.

Congress could encourage employers to set up their own sidecar accounts by offering tax advantages or instructing the U.S. Labor Department to carve out regulatory protections for retirement plans that do.

“If we tell workers they can take from their 401(k)s, what kind of message are we sending?” asked Dan Doonan, executive director of that National Institute on Retirement Security. “You can create a situation that isn’t ideal for closing the retirement savings gap.”

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editor responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com, Melissa B. Robinson at mrobinson@bloomberglaw.com