Double-clicking on Emergency Savings

After the other E-word (ESG), Emergency Savings is one of the year’s hottest topics. We wanted to know: how much of that is talk, and how much of it is action? We cornered our friend Sid Pailla, CEO of new firm Sunny Day Fund, to shed some light for us.

Sid, workplace emergency savings has become a very hot topic, but it’s not very common at work. What’s the impediment?

It's expectations, I think. Until recently, we haven't thought about emergency savings as something the employer offers. We have gotten used to the idea of retirement savings. And now we are extending – because emergency savings close to the paycheck works better.

The opportunity is big for employers, and starting to take off. We were talking to one of the largest brand companies here in the US yesterday. In their words: if you're not an early adopter, you're reacting and out of date. Offering emergency savings gives employers an opportunity to distinguish themselves.

Enter the experts – tell us more about what you’re doing in this space.

So I'm the founder and CEO of Sunny Day Fund. We focus on making saving toward emergencies easy, accessible, and rewarding for both employees and their employers.

When we are thinking about emergency savings there's a sense that it is just an account. But what we have seen in research and our work over the last few years, is that it's not just about the technology, it's about the human engagement as well. What our technology enables is the offering of a savings program. We wrap that program with an thoughtful engagement approach that improves success.

So how does that work?

Here's where it starts. Imagine you’re an employer who wants to offer emergency savings as a benefit. We work with you to set up an out-of-plan emergency savings program. As part of this we set up savings accounts for your employees.

We work with your payroll team to create a post-tax deduction and the taxable fringe benefit code associated with an employer contribution, if you’re electing to make one.

We have those contributions going into an FDIC-insured savings account in the name of the employee.

Employees can access their accounts directly and immediately. I like to joke that we're giving Brittany Spears her own account, rather than trying to be the father in the mix. We want to make sure that people have full savings portability and that they’re not subject to any risk or plan-related delays. There are no penalties, no minimums, and the account offers a market leading interest rate.

Interesting. What are you doing to make this benefit easy and attractive for employers?

Well an immediate benefit is employee retention and satisfaction. But we can provide important workforce metrics as well.

We use our technology to automate payroll-based contributions, going from point A to point B. Naturally we do that over and over again across thousands of employees. What's really interesting for you as an employer is the high level data. This includes summary metrics on how many people are contributing, how much people are putting into their emergency savings, what is the usage looking like in general?

We provide these types of aggregated, anonymized data analytics back to the employer, focused both on emergency savings, and also on other short-term financial goals established by savers, and enabled over our platform.

What we do beyond the technology is to sit down with HR, with the team leaders within these different companies, and we equip them with program marketing resources. We provide presentations, and we create a narrative about the full financial well-being of the individual. This includes not just retirement and health savings, as well as the other employee benefits that the employer is offering, but now Sunny Day Fund and emergency savings. So that's the full package of what we do.

We’re thinking about how much better our life would've been over the course of the last 30 years, if we had had emergency savings is an employer benefit. Let's circle back around to this out-of-plan concept, this is worth a closer look.

When we're thinking about out-of-plan, we're providing an employee with an account structure that they understand. Very simply. It's not yet another tax code alpha numeric where they're having to look up what it means, which is how many people feel about 401(k), 403(b) and 457. So it's simpler.

It also has higher reach. By contrast, for an in-plan solution to exist, you need the retirement pipes to be there in the first place. When you think about the fact that half of Americans don't have retirement savings through their workplace, let's make sure that we're not making the same mistake twice. That's one positive aspect of out-of-plan emergency savings.

You’ve said user experience matters here. Tell us more about that.

When we were building Sunny Day Fund, we built it with a lot of employee input. This required interviews with over a thousand people and years of work. We focused on just listening to people about what they want. We studied the concept of savings ‘buckets’ – long term (retirement) and short term.

One of the biggest findings to come out of this work was surprising. Basically if people saw a high amount of money in the 401(k) account and then they saw next to it an emergency savings fund with less money, there was an instinct to go to the 401(k) for their short-term needs – because there was just more money in that bucket.

That got us thinking differently – that it might be important to create a little more separation between these two accounts. The default was a simpler account structure, a basic FDIC-insured savings account. The FDIC label is especially important from a trust and inclusion perspective. And then we are making sure that people can access those funds more quickly than they might through a retirement plan structure.

That’s a perspective we haven’t heard before.

It was new to us too! I’ll share two last thoughts on out-of-plan. First, we realized there are a lot of other things that can be done alongside emergency savings. Once the savings structure is in place, we can use the program to enable a person to pre-plan for, let's say, buying holiday gifts, or a car down payment, a security deposit, or starting a family. These are, in fact, goals people have created for themselves in Sunny Day Fund savings programs.

In actual experience, people end up having more in total savings they can access if something goes wrong than if they were only saving in case of an emergency.

One final thought. When we saw that Secure Act 2.0 included a hard cap on the $2,500 for in-plan solutions we were concerned that, even at the federal poverty level, $2,500 is not the three months of savings that anyone wants us to have. For us, that limit outweighs any potential tax benefits an in-plan solution might offer.

And how is the uptake going – share some metrics, if you will.

We've seen the early data that nine in ten working adults want this. So I'm very enthusiastic about the growth here. Let me just talk about Sunny Day Fund and what we have seen from our rollouts.

When we are looking at the initial kickoff period – whether it's an open enrollment or an off enrollment kickoff – typically within the first couple weeks we have seen anywhere from around 30% enrollment right off the bat, which has been great. Think about that – right away, 30% voluntary enrollment.

What we see after that is that over time we're getting to closer to 50% to 60% stabilized voluntary enrollment.

So participation rates rise – why do you think that’s happening?

It's really driven by a few things. One, not everyone pays attention to all the emails that are coming in or things that are happening. What they do pay attention to is what their coworkers are doing. So we are seeing the social component playing a role to the adoption of emergency savings.

Second, most of our employers offer employee rewards for saving, generally quarterly. As those rewards are paid out, it reinforces for people, “oh, there's something extra in this – my employer is paying into my account too.” So that really gets people excited for participating.

And third, even though we're seeing around 25% higher employer retention rates for our participants, as I said, many do not participate at first. The people that are not participating, are turning over slowly or leaving the company one way or another. New hires are offered emergency savings as an active choice. Like retirement savings, health, all these other health insurance, now Sunny Day Fund. Do you want to do it, yes or no? At that point, we're seeing actually closer to 80% to 90% voluntary participation.

What are you discovering with regard to any links between workplace emergency saving and improvements in retirement saving

I’ll say first that the research shared has been absolutely fantastic. I'm sure you have read the pieces from the Aspen Financial Security Program, DCIIA, and Morningstar that have found that having a thousand dollars in emergency savings cuts the incidence of 401(k) loans and withdrawals in half.

This is really interesting, but it’s focused on leakage. Let me point out something basic. When an employer offers retirement savings as a benefit, it doesn’t meet the full portfolio of savings needs. I'm sure you recall the data that we saw from Will Sandbrook over at Nest and what they found in the UK rollout that introducing emergency savings is also elevating the participation in retirement savings as well.

So we started asking the why questions: what is it that has people excited about both things? Turns out it's a sense of competence and security. A sense of competence and security – the emotional undertone to the rational savings behavior they are doing matters a great deal.

One other link that we suspect exists is that when savers have an explicit emergency savings account, they will be more likely to keep or be patient with the long-term investments in their retirement savings accounts. This deserved more study, but we predict more people will stay on queue with their target date funds and funds that are supposed to grow.

2023 is right around the corner – what do you expect will be your top priorities?

We are very excited for 2023. We feel like it will be a real coming out year for us at Sunny Day Fund. A few things. First and foremost, we are launching with a lot of companies in the calendar year 2023. So January will be a big month for net new users on Sunny Day Fund.

In 2023 we will have our very first set of enterprises live as well. These are employers with more than 10,000 employees. To us, this is an early indicator of mass market usage.

Number three for us is Secure Act 2.0 and enabling automatic enrollment into emergency savings. Now, this is where I'll have a request for your readers and listeners. Right now SECURE 2.0 focuses on automatic enrollment into in-plan emergency saving. Out-of-plan is currently being discussed but not yet in the draft bill.

Policy folks: I encourage you to more than write to your congress person and senator, because at the end of the day these are your employees, this is your savings. So this will make things a lot smoother for everyone involved. So, yes, those are three of the things we're excited about.

Sid, we are near our close, what haven’t we asked that’s worth a mention?

I'll keep it brief here. I think that we have seen on the 401(k) leakage side that the predominant leakage has been happening in Black and Hispanic communities as well as by female participants.

When we are thinking about stopping leakage, we should be thinking about this as enabling those communities to also build wealth. So I want to encourage folks that are thinking about providing emergency savings to consider that this is really a pathway for elevating wealth.

We find we've helped individuals to open their very first bank account ever. Everyone should have the ability to save and build assets. And that's what we've been able to do. So folks that have too often been denied access to financial services, I just want to stress to all of us that we remember those communities and meet them where they are.

That is awesome. Sid Pailla, it's been lovely to talk with you today – thank you for your perspective and insights. We'll look forward talking again soon.

Sid Pailla is the Founder & CEO of Sunny Day Fund® (SDF), which partners with employers to make saving for emergencies and immediate financial goals easy, accessible, and rewarding. Sid is on a broader mission to normalize emergency savings as a benefit for hardworking Americans, three quarters of whom lack the basic three months of savings on hand. Sid and the Sunny Day Fund team are pursuing this mission driven by their own personal experiences with financial hardships, and their work has been amplified by the Financial Solutions Lab at the Financial Health Network, Global Good Fund, Techstars, MassChallenge and more. You can connect with Sid at LinkedIn and by email here.

This piece was featured in the December 1, 2022, edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here