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Since 401(k)s were first introduced in 1978, the long-term savings plan has become an integral component of retirement for many Americans. The Census Bureau reported in 2020 that 34.6% of Americans have some kind of employer-sponsored defined-contribution retirement plan, such as a 401(k), 403(b), 503(b), or Thrift Savings Plan. By the time workers approach retirement age, they should have saved and invested a considerable amount of money: the median estimated 401(k) balance for people in their 50s is $590,239.
That amount might seem like plenty, but increasingly, employees are concerned that they won’t have enough money to retire. In 2024, 79% of Americans agreed there was a retirement crisis, and 55% were worried they might not be able to achieve financial security in retirement. One significant variable that’s contributing to this dynamic involves withdrawing funds from retirement accounts in order to deal with financial emergencies: More Americans are using retirement savings to pay off debt, catch up on overdue mortgage payments, or deal with other monetary hardships.
By offering workplace emergency savings accounts (ESAs), employers can help employees leave their retirement savings untouched. This allows the 401(k) to grow more effectively and providing workers with more peace-of-mind around their retirement. Here’s everything employers need to consider.
When economists or financial experts talk about 401(k) “leakage,” they’re referring to a specific behavior involving early withdrawals from workplace retirement accounts that are used for non-retirement purposes. These funds are not diverted into individual retirement accounts or moved to another savings account; instead, they help pay for unexpected expenses or emergencies.
There are a number of common reasons why employees might make an early withdrawal from their 401(k), including to help pay for medical expenses for themselves or a family member, funeral costs, or tuition. Sometimes people might withdraw money from their 401(k) or cash it out when changing jobs in order to help pay for a larger purchase, such as a down payment on a house.
An early withdrawal not only means that it will take longer to reach retirement goals; these transactions can also involve income tax, an additional 10% tax, and other fees and expenses. According to the Employee Benefit Research Institute, the average retirement deficit of $49,182 would increase to $71,786 if all workers cashed out their 401(k) account when changing jobs. The EBRI estimated in 2022 that cash-out leakage alone costs savers between $60 billion and $105 billion every year.
A workplace ESA is a savings account for employees that is specifically designated for emergencies and that is sponsored by their employer. Employees can set up these accounts with minimal effort — many workplace ESAs require just a few pieces of information from the employee, or clicks on an app, to get started.
The account is linked to the organization’s payroll, so employees can set aside a predetermined amount of money for emergencies in each paycheck, which will be withdrawn from their pay and deposited into the workplace ESA. This makes it easier for employees to save for an emergency because they don’t have to set up recurring transfers or manually withdraw and deposit money; their emergency savings will grow automatically every time they get paid.
Unlike a traditional savings account or a retirement savings account, workplace ESAs are designed to be flexible and low-cost. There are no fees or penalties involved when employees withdraw money from a workplace ESA. Employers can also offer matching or sign-up bonuses to their employees who use their workplace ESA, allowing employees to save more money faster than they could in a non-workplace savings account.
Many employees say that a matched workplace ESA would be the most compelling benefit that a potential employer could offer them, and they tend to be more flexible for employers, too. Employers can provide a workplace ESA to their entire workforce — full-time and part-time, at multiple locations, and across all income levels. They are a powerful tool for reducing financial stress as well as the resulting absenteeism and presenteeism that money worries can generate among employees.
Having any emergency savings account provides a financial cushion for savers, which reduces the need to lean on retirement savings to pay for emergencies, or can even eliminate it entirely. Many Americans would struggle to pay for a $500 emergency without relying on high-interest credit cards, and when employers offer additional savings incentives (such as a per-paycheck match or sign-up bonus), it’s easier to save at least a few hundred dollars for an emergency.
A workplace ESA is a fully liquid account, meaning that employees can immediately access their money and transfer it to their checking account without any waiting periods, tax penalties, or fees, all of which they’ll have to navigate if withdrawing from a 401(k). Employees who are stressed about their finances are less likely to be engaged and focused at work, more likely to have adversarial encounters and relationships with their coworkers, more likely to be looking for a new job, and less likely to recommend their current employer to friends and family members.
UPS saw the tangible benefits of implementing workplace ESAs when the organization partnered with financial services providers to offer an integrated ESA. According to the case study, more than 75% of program participants chose to contribute at least 2% of their pay, resulting in $10 million in new savings. Employees who increased their after-tax contributions for emergency savings were also twice as likely to increase their pre-tax retirement contributions, meaning they saved more in both retirement accounts and ESAs.
Implementing a workplace ESA involves several steps for employers:
Employees will almost certainly have questions about the new benefit, starting with why emergency savings are important in the first place. Sharing details about how emergency savings can be used, the incentive structure of the ESA, how quickly an ESA can grow with relatively minimal investment, and how easy it is to withdraw money when it’s needed are all ways to connect with employees and help alleviate any hesitations they might have about the new program.
A workplace ESA can integrate seamlessly with existing benefits packages, including a 401(k) retirement plan. There are even ways to link the workplace ESA with a retirement plan, which is known as a pension-linked emergency savings account (PLESA). There are benefits and drawbacks to PLESAs; while employers might appreciate the ability to automatically enroll employees into both a 401(k) and a PLESA, a PLESA is less flexible in many ways than a standalone workplace ESA. There are withdrawal limits with PLESAs, and employers can’t offer matching bonuses, to name just a couple of drawbacks.
When employees have access to emergency savings, they are less likely to feel financial stress at work, more likely to be productive and focused, and more likely to leave their 401(k) accounts untouched, allowing them to retire as planned. Offering a workplace ESA can help employers differentiate themselves in competitive areas where recruiting and retaining skilled workers is a struggle, as well as build a culture of caring in a workplace. For organizations that seek to support employee financial health and retirement-readiness, a workplace ESA is a perfect place to start.