The evolution of emergency savings accounts

Read NoW
Devin Miller
February 21, 2024

An area of workplace benefits that has increasingly taken center stage is emergency savings, commonly referred to as emergency savings accounts (ESAs). These financial tools have become pivotal in promoting financial security among working Americans. With the SECURE 2.0 Act coming into play, ESAs are receiving increased regulatory attention, making them more relevant and critical than ever.

There’s a rich history behind ESAs, and today we’re tracing their evolution, from early origins, to responses to the COVID-19 pandemic, current trends, and future prospects. This trajectory shows us how emergency savings has transitioned from a novel idea to a crucial component of employee benefits. 

The genesis of workplace emergency savings

The concept of emergency savings has deep historical roots that we can trace back to before modern times. The formalized method of depositing savings into structured bank accounts like the ESAs of today has evolved over time. 

The practice of saving for emergencies dates back to prehistoric times, with early agricultural cultures setting aside surplus resources for unexpected events. This practice evolved into informal savings groups, like “susus” in West Africa, before the advent of modern banking in the 1300s introduced formal savings accounts. The 20th century saw further developments, including special-purpose savings accounts like Christmas clubs and the popularization of emergency funds by financial advisors.

As financial markets and products became more complex, governmental organizations and public agencies began to place more emphasis on financial literacy. One fundamental component of personal financial planning was the need for emergency savings.

Given this growing emphasis, employers have begun recognizing the importance of financial wellness for their employees. More organizations are integrating ESAs into workplace benefits, which gives employees the opportunity to automatically contribute to dedicated emergency funds.

Early wins: The UPS emergency savings program

One successful workplace emergency savings case study is UPS. With the aim of helping mitigate financial stress for their employees, UPS partnered with major financial services providers to develop an emergency savings program integrated into the company’s 401(k) plan. The program offers after-tax contributions for easier access and withdrawal without penalty​​​​.

The incorporation of ESAs had a notable impact on employees with low to moderate incomes. The program resulted in $10 million in new savings, with a 39% increase in participation in the first year alone. Over 75% of participants chose to contribute at least 2% of their pay, showing a significant step towards establishing a financial safety net​​.

A final achievement was the program’s positive influence on retirement savings. Employees who increased their after-tax contributions for emergency savings were twice as likely to boost their pre-tax retirement contributions, alleviating concerns about potential negative impacts on retirement savings. With a 76% participation rate, the UPS program shows the promise of emergency savings while also demonstrating that there’s room for even stronger performance of ESA programs. 

Imagining a different pandemic response

The COVID-19 pandemic was an unprecedented challenge that shook the financial stability of a large swathe of Americans. A significant part of this instability was due to the lack of preparedness in terms of emergency savings. Let’s imagine a scenario where, prior to the pandemic, widespread ESAs with a minimum balance were a standard component of workplace benefits. How would this have influenced the economic outcomes of the pandemic?

  • Impact on CARES Act and PPP loans: The CARES Act and Paycheck Protection Program (PPP) loans were crucial lifelines for individuals and businesses during the pandemic. But the presence of robust ESAs before the pandemic could have reduced the immediate reliance on these programs. A 2021 survey by Bankrate found only 40% of Americans could cover an unexpected $1,000 expense with savings prior to the pandemic. With mandatory ESAs in place, a greater number of individuals would have had a financial cushion, potentially lessening the demand for CARES Act funds and PPP loans.
  • Mitigating financial shocks: Emergency savings serve as a critical buffer during financial shocks. The Federal Reserve found that 36% of adults would have struggled to cover three months of expenses during the pandemic. With mandatory ESAs, Americans could have been better positioned to navigate the economic turbulence without resorting to high-interest loans or taking penalties on retirement savings loans.
  • Influence on inflation: The influx of government assistance during the pandemic, while necessary, also had inflationary impacts. Research by the National Bureau of Economic Research (NBER) suggests that pandemic-related fiscal policies contributed to the inflation surge in 2021. Widespread emergency savings could have moderated the scale of direct fiscal interventions and potentially eased inflationary pressures.

The pandemic was a valuable learning opportunity for employers and employees alike, and the ensuing emphasis on emergency savings makes sense given the extreme uncertainty of recent years.

The current landscape of ESAs

Today, a diverse range of organizations — including employers, financial institutions, payroll providers, and policymakers — have come together to prioritize ESAs for Americans. This collaborative approach has helped shift the broader public towards prioritizing short-term savings, extending the reach of emergency savings solutions to millions of workers​​. Notable aspects of ESA adoption include:

  • The role of employers in fostering financial health. Employers play a central role in supporting worker financial health through both traditional and alternative benefits like emergency savings. Employers are increasingly choosing ESAs to help address workers’ chronic financial stress, which costs employers an estimated $250 billion annually in reduced productivity, according to BlackRock
  • Payroll providers: Expanding access to liquid savings. Because of the payroll industry’s direct role in delivering net pay and the existing payroll card solutions, these providers are uniquely positioned to increase employee access to liquid savings. Vendors like ADP — whose Wisely® card and myWisely® mobile app resulted in $1.55 billion saved, reports the same study from BlackRock — have enhanced emergency savings features on their platforms, leading to substantial growth in savings. 
  • Bridging short-term and retirement savings. Despite worries to the contrary, research shows that employees with adequate emergency savings are less likely to tap into their retirement funds for emergencies, helping improve both their short- and long-term financial security​​. Plus, integrating both in-plan and out-of-plan emergency savings accounts can help protect retirement plan balances and encourage higher contributions. Low-income households with at least $1,000 in emergency savings are significantly less likely to withdraw from their workplace retirement accounts, underlining the importance of these savings in financial planning​​, BlackRock reports.
  • The power of auto-enrollment. Auto-enrollment has emerged as a powerful tool in promoting emergency savings, and research has proven that it dramatically improves emergency savings rates. However, it’s important that your program fully complies with governmental regulations by clearly informing employees about program enrollment and having a noticeable opt-out option. An auto-enrollment pilot in the UK saw a staggering increase in savings participation, from 1.3% in the opt-in group to 52.6% in the auto-save group — emphasizing the effectiveness of making emergency savings tools a standard feature embedded in current benefits structures.
  • In-plan vs. out-of-plan ESAs. While in-plan options like pension-linked emergency savings accounts (PLESAs) have significantly broadened access to high-quality emergency savings, they aren’t a one-size-fits-all solution. With 58% of the lowest earning Americans lacking access to an in-plan retirement option (which typically would include PLESAs), according to BlackRock, this critical gap still needs to be addressed. Employers today are increasingly providing savings options that are separate from retirement plans to meet the needs of these workers.

Trends we’re seeing among SecureSave employers

The patterns among organizations that use SecureSave to power their workplace emergency savings programs are insightful. Across the board, the employee adoption rate is 62%, which is notably higher than most employee benefits. Adoption has steadily increased in the time we’ve been measuring it as well - jumping from 56% as of 2022. Once an employee adopts the emergency fund, annual user retention is 95.5% with an average of $1,000 saved per participant in the first year.

The emergency savings offering appeals to organizations across a wide range of sectors. Not only are we seeing strong adoption among hourly and low-wage employers in sectors like manufacturing and healthcare, but high-care employers in professional services and other industries are adding emergency savings to strengthen already competitive benefits packages.

We find that the majority of SecureSave employers offer both a signup match and a payroll match for employees that participate in their emergency savings program. A signup match involves the employer contributing a certain amount upon an employee’s initial registration for the ESA program, whereas a payroll match involves a certain amount or percentage that the employer contributes towards participating employees’ ESA at each payroll. Here’s a look at the numbers:

  • 74% of employers offer a signup match
  • 79% of employers offer payroll match
  • 22% of employers offer some sort of milestone bonus

Providing employee contributions or offering a match in some way helps encourage participation over time. Most organizations (85% of SecureSave customers) offer $100 or more in incentives to participating employees on an annual basis through one or more of these methods. Although participation in milestone bonuses is lower, they can be an impactful offering where employers contribute bonus funds to an employee’s ESA after an individual reaches a specified milestone — either a certain number of payroll contributions or a total dollar amount saved in their account. For example, an employer might offer a $100 or $500 bonus when employees hit a milestone like 26 payrolls (contributing a minimum dollar amount to their ESA at each payroll). 

Present and future outlook for ESAs

The sentiment toward ESAs among employers and employees in 2024 is decidedly positive and is quickly gaining momentum. Innovations and early deployments by industry players like SecureSave, Fidelity, Sunny Day Fund, and major recordkeepers highlight the essential role of ESAs in financial wellness programs. 

Transamerica estimates that by 2026, over 40% of employers will offer an emergency savings program. With major corporations like Delta Airlines, Starbucks, Humana, ADP, Best Buy, and Truist (reported by BlackRock) offering robust workplace savings programs, some with employer matching, we’re likely to see additional Fortune 500 companies follow suit.

SECURE 2.0 Act

The SECURE 2.0 Act is set to play a pivotal role in promoting the adoption of ESAs, with the act in effect as of January 2024 and the IRS issuing initial guidance for employers on setting up in-plan emergency savings provisions. The act provides guidance on PLESAs, which are short-term savings accounts tied to a defined contribution retirement plan and are treated like designated Roth accounts. 

Under SECURE 2.0, PLESAs are accessible to non-highly compensated employees who can be automatically enrolled. Employers can match contributions up to $2,500 or a lower limit set by the plan. Participants can withdraw at least once per month, with distributions treated as qualified. These provisions facilitate emergency savings for a critically underserved population while safeguarding against the early distribution tax penalty. 

The automatic enrollment option is particularly promising, with current data showing that participation in ESAs can jump from as low as 1% to as high as 71% when auto enrollment is implemented​​. This legislative support underscores a significant shift toward recognizing the need for ESAs as a standard part of employee benefits packages.

Growing ESA market size

The current market size of workplace ESAs is already substantial, and poised to grow significantly in the coming years. Recent SecureSave research suggests that the demand for ESAs is so high that: 

  • 90% of employees would participate if such a program were available, especially with incentives like employer matching​​. 
  • 41% said that when job seeking, an emergency savings program with employer matching would be a more important benefit to them than an employer-matched 401(k). 

With such significant demand and promising case studies in the market, employers will be compelled to respond accordingly. 

A quick examination of the adoption of Health Savings Accounts (HSAs) and 401(k)s sheds some light on the potential growth trajectory of ESAs. Both HSAs and 401(k)s faced initial reluctance but grew as their benefits became clearer: 

  • By the early 1980s, nearly half of large firms were offering or planning to offer 401(k)s, and it was legislation permitting automatic enrollment that notably increased their adoption.
  • HSAs began gaining traction following the Medicare Modernization Act in 2003, which tied HSAs to high-deductible health plans (HDHPs) to promote financial responsibility for healthcare costs.  
  • HSAs have seen significant growth, with Devenir reporting HSA assets reaching $65.9 billion, up 23% year-over-year, and contributions exceeding $38.8 billion in 2019. Employers are now increasingly offering HSAs alongside HDHPs, recognizing them as complementary to 401(k)s for retirement healthcare expenses.

If ESAs were to follow a similar trajectory, the market growth will be explosive in the next 5-10 years.

Looking ahead

As we look forward, ESAs are anticipated to become a foundational element in workplace benefits, contributing to employees' financial stability and employers' productivity. With growing regulatory attention, more market players coming on board, and a growing recognition of their importance, it’s possible that in the future we could see ESAs become as commonplace as 401(k)s. SecureSave is proud to help lead the way in mainstreaming ESAs to ensure that employees can save for the unexpected and achieve greater financial resilience and well-being​​.

Previous Post

How to set up ESA benefits

Next Post

Find out how much emergency savings you actually need

Next Post

Find out how much emergency savings you actually need

Previous Post

How to set up ESA benefits


Devin Miller

More posts by
Devin Miller