Why free isn't always the right option for emergency savings accounts: a guide for employers

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Devin Miller
June 20, 2023

Workplace emergency savings accounts (ESAs) have been in both the news and the legislature, as new offerings hit the market amid ongoing concern about American workers’ financial solvency and emergency savings bandwidth.

Financial experts typically recommend saving between three and six months’ worth of expenses for emergencies, but most Americans would struggle to cover an unexpected $1,000 expense with cash. A workplace ESA can help employees save up money automatically and easily by transferring a paycheck deduction into an account specifically set up for emergencies. And employees who feel financially secure are happier, less likely to seek new employment, and more likely to recommend their workplace to a friend or family member.

If you want to provide a workplace ESA to your employees, there are a few key differences between the free and paid options that you can add to your benefits plan. Which is better? We’ll explain more so you can make the best decision for your own workplace.

What is a free workplace ESA?

As the name suggests, a free workplace ESA is an ESA that is free for employers. That is, companies are not paying to add the ESA to their benefits portfolio.

There are a number of free workplace ESAs currently available, mostly tied to existing retirement savings plans, such as 401(k)s. These are known as “in-plan ESAs.” Some other free workplace ESAs, such as Fidelity’s Goal Booster, offer several different types of savings accounts (including investment accounts).

Free workplace ESAs: Pros and cons

One big and obvious perk to the free workplace ESAs is that it’s free for the employer to implement — at least, from a financial standpoint. Depending on the type of ESA and how it’s set up, some free ESAs also have a baked-in drawback: They can be more complicated to implement and have less flexibility, making them a greater burden for your people operations team.

The biggest drawback to a free workplace ESA is that the funds might not be immediately available for withdrawal. This essentially negates the entire purpose of emergency savings: To provide a cushion against urgent and unexpected financial needs. Some free plans might even include penalties or fees for withdrawing funds.

With many free workplace ESAs, employers can’t include a per-paycheck match. And the sign-up process to enroll employees can be complicated.

If it’s an in-plan ESA, another drawback is the account cap or limit. After accruing $2,500, these ESAs automatically deposit any overflow into a long-term retirement account. There are many kinds of emergencies, including home repairs or car down payments, that might require more than $2,500, and if those were to emerge for an employee with one of these ESAs, they might have to borrow against their retirement savings to make up the shortfall.

Another problem with a free workplace ESA is that employers might not be able to offer access to all employees. In-plan ESAs can be provided to any employee with a retirement plan, but part-time employees or full-time staff who choose not to enroll in the retirement savings plan would not be eligible.

Even free workplace ESAs that intend to offer more flexibility can sometimes unintentionally limit how (and how much) employees are able to save. Short-term savings packages typically require employees to choose one type of short-term savings account depending on their goals. Some of those accounts are investment accounts, which means they can often accrue more in interest than a typical savings account, but the cash deposited in these accounts might not be guaranteed or FDIC-insured — meaning it can be lost if the investments go south.

To some extent, offering several choices of short-term savings accounts can in and of itself be a drawback! Experts recommend that everyone have a savings account that’s dedicated to emergencies only. If given the option, some employees might choose to save money for a vacation getaway or a wedding before fully establishing their emergency accounts.

Finally, a free workplace ESA might or might not give employers the ability to track exactly how much money their employees are saving, how much is getting withdrawn, and what those numbers mean for their employees’ overall financial well-being.

What is a paid workplace ESA?

A paid workplace ESA creates plan accounts dedicated specifically to emergencies and for which employers pay a nominal fee. While the paid aspect of these workplace ESAs might be considered one drawback, in general, they can be a better all-around savings option for both employers and their employees.

Paid workplace ESAs: Pros and cons

Paid workplace ESAs can be available to any and all employees, no matter how many hours per week they work, or whether they have a retirement savings plan through their employer. As the employer, you decide who can be eligible, with no limits.

A paid workplace ESA is a designated emergency-only account, which means that employees aren’t getting confused or distracted by other short-term savings options before they’ve accrued a decent cushion in their ESA. It also means that the money in these accounts is guaranteed and protected against fraud and theft, and that there are no barriers to withdrawing the money, including any fees or penalties. These accounts are also FDIC-insured, and they can include competitive interest rates to build the savings.

There is no limit to the amount of money an employee can save in a paid workplace ESA, unlike some free options. A paid workplace ESA also tends to be a smaller administrative burden, easier for your accounting or people operations staff to implement, and easy for employees to use — even when they leave.

And there’s one more big perk for employers: Paid workplace ESAs have sophisticated tracking and reporting capabilities, giving management insight into how much money is being saved, how much is being spent, and the overall financial health of their workforce.

How to choose the best ESA for your employees

So which is better, a paid or a free workplace ESA? It really depends on your specific situation, your workforce, and other variables, but here are some things to consider before deciding.

  • Interest rates and fees: What kind of interest can your employees accrue with each type of ESA? Are there fees or penalties for withdrawing money? How much are they, and how often are they charged?
  • Accessibility of funds: How easy will it be for your employees to withdraw money from the ESA? Is the transfer of funds immediate? If there is a waiting period, how long is it?
  • Ease of use: How easy is it to set up the ESA for each individual employee? How easy is it for those employees to deposit money into those accounts? 
  • Account limits and restrictions: Is there a cap on how much employees can ultimately save in the ESA? What is it? Can you offer the ESA to every employee, or are there barriers around who can be eligible?
  • Features and benefits: Can you track savings progress and see when withdrawals are made? Can you make matching or milestone contributions as the employer to help boost emergency savings? How easy is it to transfer the account upon separation?
  • Focus and scope: Are employees being encouraged to save for emergencies before considering other short-term savings goals? How much guidance will you need to offer your employees around how to understand different plan options and choose the best one?

Promoting your ESA: Generating buy-in

Once you’ve selected your workplace ESA, it’s time to share the good news with your employees. How can you do this in a way that gives you the best participation rates and maximizes the value of your workplace ESA, whether it’s paid or free?

Most employees say they’d use this benefit if it were offered to them, so you’re already ahead of the game. Apart from letting them know that the program exists and is active through any typical benefits channels — email, employee handbooks or workplace wikis, all-hands meetings, and others — you can also talk to your management team about the workplace ESA, mention it in any other financial education or financial wellness information you’re offering, and even give your employees a way to track their own progress.

To encourage regular contributions, you can also offer monetary incentives: A sign-up incentive to boost participation, employer matching of a certain percentage of contributions, or milestone bonuses that kick in after employees reach certain savings goals, just to name a handful.

When choosing an ESA, think beyond the price tag

A workplace ESA can be a popular and powerful addition to your employee benefits package, but remember that “free” doesn’t always mean “better,” especially in this case. An ESA that’s free for you might add a significant administrative burden to your staff, or pass along charges and fees to your employees exactly when they don’t need it the most: During a financial emergency. That’s why it’s critical to carefully consider all the benefits and drawbacks of both paid and free workplace ESAs before you add one to your benefits plan.

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Devin Miller

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