At any given time, 20% of retirement plan participants have an outstanding loan from their workplace retirement plan, according to the National Bureau of Economic Research.

“Loan overutilization is one of the biggest problems plaguing retirement plans,” says Michael Webb, vice president of Cammack Retirement Group in New York City. “Many people are living paycheck to paycheck and have no emergency savings. Plan sponsors are concerned about this and don’t really know how to deal with the problem.

Their starting point is to restrict the number of loans their workers can take out, but that is a ‘stick’ approach. People still have the need to create an emergency savings account so that they don’t take out the loans.” Indeed, a recent survey by PNC Financial Services Group found that 38% of people in the so-called “sandwich generation” do not have an emergency savings fund, and among those who do, 31% have an emergency savings fund that would last less than six months.

This is why Webb is calling for retirement plan sponsors to create automated emergency savings accounts, either by buying a service from a retail provider or asking their recordkeeper to create sidecar accounts. “Technology that automates after-tax savings has come a long way,” Webb writes in a recent blog,

“Automated Emergency Savings Funds: Why Plan Sponsors Should Consider Offering Them.” “From rounding up all purchases and saving the difference, saving when a raise is received or monitoring spending patterns and automatically saving more when there is more money in an individual’s checking account(s)—there are far more options to save than simply deducting dollars form an account each month.”

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