EBRI Report Points to Need for Emergency Fund Within 401k Plans

The Employee Benefit Research Institute (EBRI) released a report in August 2019  based on data they examined from the Federal Reserve that points for the need of a rainy day fund paired with 401k plans to help cover unexpected emergency expenses including a job loss. The emergency fund would also help reduce distributions from 401k plans for emergency reasons, which is not always the best option(for some it is the only option) since taxes and early distribution penalties apply.

Following is data  from the EBRI report with some drawn from the Federal Reserve Data:

  • Only half of workers say they have a rainy day fund that could cover three months of expenses in case of sickness, job loss, economic downturn, or other emergencies.
  • Families whose heads were DC plan (note that the solo 401k plan falls under this umbrella) participants were found to be more likely to have sufficient liquid savings to cover three months of expenses.
  • The need for an emergency savings fund is not limited to just families with low incomes or with younger heads.

Emergency Fund Could Potentially Increase 401k Balances

The EBRI report also sates that addressing short-term financial issues could lead to even better long-term results through a reduced need for early withdrawals (and tax penalties) and potentially higher contributions to a DC plan after an account for short-term financial issues is funded.

However, EBRI understands that the current rules applicable to DC plans (e.g., 401ks and PSPs) would need to be amended in order to implement an emergency fund in within the 401k umbrella, but the infrastructure to provide it appears to already be available.

Closing Comments

Here at My Solo 41k Financial, we have seen a steady uptick over the last 10 (ten) years in solo 401k owners taking distributions to cover unexpected expenses  ranging from a car repair to a more financially challenging event such as a spouse’s job loss. Therefore,  we can certainly understand how an emergency fund within a solo 401k plan, for example, could both benefit the plan as well as the participant. The AARP also did a study in 2018 on the need for a rainy day fund and found that 71% of employees would be in favor of a payroll-deduction rainy-day savings program.



About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>


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