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Congress has a plan to link your retirement and emergency savings plans

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The Federal Reserve’s rate hike this week is stoking concerns of a U.S. recession, which in the worst-case scenario could lead to mass layoffs and cash-strapped consumers. However, a plan from Congress moved forward this week that could better prepare U.S. workers for such downturns.

If lawmakers have their way, U.S. workers could automatically save for emergencies and retirement at the same time in the years ahead. Simply put: Workers would be automatically enrolled into a program to put aside a small percentage of their paycheck for emergencies with their company able to match those funds into a retirement plan like a 401(k).

“This is really exciting because workers have real challenges about emergency savings,” Jamie Kalamarides, a senior fellow at Prosperity Now, told Yahoo Finance Live this week.

Advocates have encouraged plans to help more Americans save for emergencies. An oft-cited 2018 study from the Federal Reserve found that 40% of adults, “if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money.” More recent research has underscored Americans’ financial fragility. Many have to scramble — and potentially dip into retirement or take out a payday loan — when hit with as simple a curveball as unexpected car repairs.

“We’re not forcing employers to offer this, but employers have a business case to offer these sorts of solutions,” adds Kalamarides, an advocate for the provisions.

Options like payday loans or credit card fees or tapping into retirement accounts can wreak havoc on an employee’s long-term financial stability.

As Suze Orman, the well-known financial adviser, put in this week’s episode of Yahoo Finance’s “Influencers,” “If you don’t have at least a 12-month emergency fund, you better start working on that right now because if you don’t, you could find yourself in serious trouble.”

Automatic enrollment is the key here’

Companies are currently free of course to set up emergency savings accounts for their employees; in fact, Orman is funding a startup that does just that. However, advocates say participation rates will stay low without a change in the law.

“We think that automatic enrollment is the key here [to reach] the consumers that most are in need of this buffer of savings,” says Shai Akabas, the director of economic policy at the Bipartisan Policy Center, who helped develop the provision.

The bill would allow employers to automatically put aside up to 3% of an employee’s salary for emergencies. Workers could opt out, but enrollment would be the default. The accounts would be capped at $2,500 with workers able to access the funds quickly for an unexpected expense, without penalties.

‘Giving people more options’

The provisions — sponsored by Sens. Cory Booker (D-NJ) and Todd Young (R-IN) — were folded into a larger retirement reform bill called the RISE & SHINE Act during a Senate hearing this week. That bill also encourages more retirement plans and has been endorsed by the U.S. Chamber of Commerce and others.

Lawmakers now aim to fold that bill into yet another bill — informally called SECURE 2.0, which passed the House in March — and make it all a single bill that can become law by the end of the year.

Another provision would also allow businesses to contribute to employees’ retirement accounts when workers make their student loan payments. The two provisions could work together and “be additive to some extent,” says Akabas. The key is “giving people more options for how they can accumulate a matching contribution from the employer,” he added.

Sen. Patty Murray (D-WA), the chair of a key Senate committee, said during the hearing this week the effort is coming together “not a moment too soon” as families still struggle following coronavirus disruptions.

Kalamarides hopes the effort will get to President Biden’s desk by the end of the year with the emergency savings provisions intact to help Americans “get through bumps in their everyday challenges, in their everyday life.”

Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.

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