If this partial government shutdown teaches America nothing else, it should remind us of how awful it is to be financially fragile. That’s what it’s called when you don’t have enough money stashed away to miss a paycheck. Surveys have shown half of all the people in this country live this way—and during the 30+ days and counting of the shutdown, we’ve seen it in real life as people often working for no pay turn to eBay, food banks and pawnshops to pay the rent and put food on the table.
Why is this the case? Wage increases have lagged inflation for years. Debt is dragging many of us down. But then there’s the fact that saving is hard. Really hard. Harder than it should be. “Saving money is one of the top five New Year’s resolutions and also in the top five for most commonly failed,” wrote Peter Economy for Inc.com. That’s a stat I’d never heard before. But I’m sure I’ll pull it out of my hat again.
It doesn’t have to be that way. The solution is making saving in a bank as easy—as automatic—as saving money in a 401(k). It’s called a sidecar account. And it could be in your future.
What Is A Sidecar Account?
A sidecar is an account that’s tacked on to your employer-sponsored 401(k) to help you build an emergency fund.
Just as with work-based retirement accounts like 401(k)s, the money you contribute to the account is automatically deducted from your paycheck. This means you never have a chance to miss the money, or debate whether or not you should set it aside in a given month. But unlike the money in a 401(k), which is deducted pretax, a sidecar account can only be funded using after tax dollars.
Additionally, the funds in a sidecar account are eligible to be used in the short term, whenever you need them—not held onto until retirement. In other words, your sidecar account would be the one you tap in the event of a broken transmission or leaky roof.
What’s So Good About Sidecar Accounts?
They provide insurance against both 401(k) leakage and credit card debt. When we’re prepared for emergencies like those, we’re far less likely to charge unexpected expenses on a credit card, or pull money out of our retirement savings, thus incurring tax penalties, and/or losing out on growth in the market. Plus, because sidecar accounts provide the all-important “set-it-and-forget-it” approach, they could lead us toward saving more than we would ordinarily in a traditional savings account.
Great, When Can I Get One?
That depends on your employer. “There’s nothing stopping employers from offering a savings plan that deducts from paychecks today,” says Brian Karimzad of MagnifyMoney.com. These wouldn’t necessarily be official “sidecars,” attached to retirement accounts, but they can automatically move money into savings out of your paycheck. Prudential, a plan administrator, is working with employers to offer savings plans that sit side by side with 401(k)s, he says.
What is harder is being able to automatically enroll new employees by default, like they can with 401(k) plans. That’s something that requires legislation. (Hmmm. When is the whole government opening again?)
A bill currently moving through the house, “Strengthening Financial Security Through Short-Term Savings Accounts Act of 2018,” could help pave the way for more employers to offer automatic enrollment for sidecar accounts. If passed, the bill could remove some of the impediments for auto-enrollments in conjunction with 401(k) plans and likely drive more employers to adopt 401(k) plans—and sidecar plans along with them. The bill has bipartisan support, and is sponsored by Cory Booker (D-N.J.), Heidi Heitkamp (D-N.D.), Tom Cotton (R-Ark.) and Todd Young (R-Ind.).
What Happens In The Meantime?
“We are seeing these accounts gain traction with employers, who are looking to make it easier to auto-enroll employees into emergency savings features in their retirement plans,” says Harry A. Dalessio, head of full services solutions within Prudential Retirement, a unit of Prudential Financial, Inc. “We have 15 sizable clients committed to offering [sidecar accounts], and we’re seeing more sponsors interested in solving for emergency savings first, in the hierarchy of needs. Only once you solve the emergency savings equation can you start to talk about the 401(k). If you can’t afford to get a flat tire fixed on your car, it’s hard to wrap your head around the importance of retirement savings.” In other words, stay tuned.
And if you’re employer doesn’t offer a program, here’s what you can do right now:
“Take portion of their paychecks and set it aside for an emergency. If you have direct deposit, and you can have money dedicated for an emergency automatically flow through a separate account, that’s a good option,” says Dalessio. “The reason [sidecar accounts] are gaining so much momentum is because the strongest savings results happen in the workplace, because the money comes out automatically. Having it come out automatically creates a different dynamic than having to do it every week or month. When it’s automatic, you don’t see, it, feel it, or touch it, and you’re not tempted to spend it.”
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*With Kathryn Tuggle