Survey Reveals Employers Hesitant to Merge 401(k) Plans with Emergency Savings

A recent survey indicates that employers are showing limited interest in integrating emergency savings options with 401(k) plans for their employees.

Starting in 2024, companies can permit emergency withdrawals of up to $1,000 from retirement savings and offer linked emergency savings accounts, but these measures aren’t being widely adopted, as pointed out in a report by Vanguard released this week.

Vanguard’s analysis of 1,300 plans revealed that merely 4% of 401(k)s support emergency withdrawals of $1,000. Additionally, it appears that employer-linked emergency savings accounts “earn minimal or no interest.”

The provisions for these plans stem from the SECURE Act 2.0, enacted in 2022, which was designed to address rising concerns over the lack of emergency savings among Americans.

While most employers haven’t set up 401(k)-linked accounts—also referred to as pension-linked emergency savings—some do provide access to external emergency savings accounts, as Craig Copeland from the Employee Benefits Research Institute noted. These accounts, often maintained at FDIC-insured banks, allow after-tax contributions deducted from payroll.

Emergency Fund Shortages

Many households face challenges in building emergency savings, especially amid ongoing high living costs. While inflation has receded somewhat, the consumer price index shows an increase of over 25% since 2020.

Financial advisors generally recommend saving three to six months’ worth of living expenses as an emergency fund. However, a recent survey by Bankrate found that only 47% of participants reported having enough money to cover a $1,000 emergency expense. Alarmingly, 29% indicated they carry more credit card debt than they have in emergency savings.

Employers’ concerns regarding their employees’ financial well-being have escalated. In a recent survey, 48% of employers rated their worries about employees’ financial situations at a 9 or 10 out of 10, a notable increase from previous years. Just four years prior, this figure was at 22%.

Contribution Limits and Rules

The Secure 2.0 law established emergency savings accounts as a supplementary feature within 401(k) plans. Contributions to these accounts are treated as after-tax contributions, which count toward the 401(k) contribution limits. For 2026, the limit will be $24,500, with an additional $8,000 for those aged 50 and older.

The law sets an annual contribution limit for emergency accounts at $2,500, subject to future inflation adjustments; this year, the cap has increased to $2,600. Despite the possibility of withdrawing $1,000 from a 401(k), many employers are hesitant to embrace these provisions.

Copeland mentioned that while many employers don’t currently take advantage of these emergency savings options, that may change over time.

Implementing an emergency savings program can be more straightforward than it seems. Will Hansen from the American Council of Plan Sponsors noted that some employers might find it easier to manage accounts that aren’t linked to 401(k)s.

However, a challenge persists regarding highly compensated employees, those earning over $160,000, who are often excluded from participating in these plans. This fluctuation complicates monitoring for 401(k) plan record keepers.

A bipartisan bill proposed in December aims to broaden eligibility for these accounts by removing the exclusion for highly compensated staff and increasing the annual contribution limit to $5,000.

External Savings Accounts Preferred

For now, it seems likely that employers will continue to collaborate with outside service providers offering emergency savings accounts. A recent study shows that over half of large companies (with 500 or more employees) provide some form of emergency funding, including outside savings accounts.

Copeland expressed that off-plan savings accounts are perceived as a “no-brainer” because they’re less complicated to set up than incorporating them into 401(k) plans. Moreover, liquidity can be a concern; accessing funds from a 401(k) plan can take longer compared to other options.