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But I Repeat Myself Again: Sidecar = Suboptimal Part 2

01/28/2019
By Jack Towarnicky

Specific purpose savings “solutions” are suboptimal.1

Many workers live paycheck-to-paycheck. Many are unable to cope with any variability in expenses and/or income. When monies are set aside for specific purposes, too often what remains are unpaid bills or high-cost debt.  

Throughout parts of five decades in plan sponsor roles, I encouraged participants to use their retirement savings account as a holistic financial wellness solution.3 Less than six months ago, I reconfirmed that the 401(k) is capable of “double duty” – it can meet savings needs today and tomorrow.4 Compared to sidecar accounts, the 401(k) is more effective at accumulating assets, generating positive investment returns and providing liquidity while also avoiding leakage. A year before that, I commented on the failure of MyRA.

But, sidecar account proposals keep coming.6 Simply, workers who live paycheck-to-paycheck won’t save (or won’t save enough) for retirement without liquidity. Too many policy wonks and academics assert that plan loans are leakage – similar to withdrawals. Plan loans are not leakage unless they are not repaid, and most plan loans are repaid.7  You should expect to see more proposals now that we have a new Congress.

Supposedly, the main purpose of these sidecar accounts is to ensure assets are available to meet emergencies and to help workers avoid pre-retirement distributions (also known as leakage). 

You can accomplish all that and more. Start by reviewing your plan’s liquidity provisions. Most can improve access while concurrently reducing leakage – eliminate hardship withdrawals, perhaps add unmatched after-tax 401(a) contributions and/or Deemed IRAs, adopt a line-of-credit loan structure and implement 21st Century loan processing (electronic banking).8 

Yes, it is that simple. Yes, you can do it today. No, you don’t need new legislation or additional regulation. And, please don’t wait for Congress to mandate some new, costly, potentially counterproductive “solution.”


1D. Soman, M. Zhao, The Fewer the Better: Number of Goals and Savings Behavior, 2011, http://www.rotman.utoronto.ca/-/media/Files/Programs-and-Areas/BEAR/Journal-Publications/Fewer-the-better-number-of-goals-JMR.pdf?la=en ; See also: S. Lewis, Babbitt, 1922, Chapter V: “… The effect of his scientific budget-planning was that he felt at once triumphantly wealthy and perilously poor. …” Accessed 12/26/18 at: http://www.gutenberg.org/files/1156/1156-h/1156-h.htm  
2J. Towarnicky, It is Not Borrow to Save, But Save to Borrow! 10/09/18, Accessed 12/26/18 at: https://www.psca.org/blog_jack_2018_45  
3J. Towarnicky, My Financial Wellness Solution: The 401(k) As A Lifetime Financial Instrument, SOA, 2017, Accessed 12/26/18 at: https://www.soa.org/essays-monographs/financial-wellness/2017-financial-wellness-essay-towarnicky.pdf  
4J. Towarnicky, Sidecar = Suboptimal, 7/30/18, Accessed 12/26/18 at: https://www.psca.org/blog_jack_2018_36 
5J. Towarnicky, Betamax, Edsel, New Coke and … now MyRA Joins An Elite Class of Marketing Failures, 7/31/17, Accessed 12/26/18 at: https://www.psca.org/blog_jack_2017_2  
6C. Harvey, D. John, S. Kathi Brown, Saving at Work for a Rainy Day Results from a National Survey of Employees, AARP Research, September 2018, Accessed 12/26/18 at: https://www.aarp.org/ppi/info-2018/saving-at-work-for-a-rainy-day-perspectives-from-employees.html; See also: J. Beshears, J. Choi, J. M. Iwry, D. John, D. Laibson, B. Madrian, Building Emergency Savings Through Employer-Sponsored Rainy Day Savings Accounts, October 2017. “… Relative to normative benchmarks, households with present bias hold too little liquid wealth and will deplete their partially liquid retirement savings (e.g., through 401(k) loans or pre-retirement distributions) when adverse shocks arise. …” Accessed 12/26/17 at: https://scholar.harvard.edu/files/laibson/files/2017-10-25_rainy_day_paper_final_2.pdf ; See also: J. Ain, J. M. Iwry, D. Newville, Saving for Now & Saving for Later: Rainy Day Savings Accounts to Boost Low-Wage Workers’ Financial Security, Brookings Institution & Prosperity Now, June 2018, Accessed 12/26/18 at: https://prosperitynow.org/resources/saving-now-and-saving-later See also: S.3218, Strengthening Financial Security Through Short-Term Savings Act. “… An employer may make available to employees a stand-alone, short-term savings account, using an automatic contribution arrangement … An employer that offers employees a short-term savings account shall deduct amounts from each participating employee's wages … and transfer such amounts to a savings account ...” Accessed 7/25/18 at: https://www.congress.gov/bill/115th-congress/senate-bill/3218/text  
7J. Towarnicky, Qualified Plan Loans, Evil or Essential? Benefits Quarterly, 2nd Quarter 2017, Accessed 12/26/18 at: https://www.ifebp.org/inforequest/ifebp/0200570.pdf  
8J. Towarnicky, Hardship Withdrawals – An Attractive Nuisance Becomes More Attractive, 02/09/18, Accessed 12/26/18 at: https://www.psca.org/blog_jack_2018_5; See also: J. Towarnicky, Cold Turkey Withdrawal, 11/26/18, Accessed 12/26/18 at: https://www.psca.org/blog_jack_2018_53 ; See also: J. Towarnicky, Impediments to Saving for Retirement – Part 2 - The Solution? The Right Kind of Liquidity, 11/09/18, Accessed 12/26/18 at: https://www.psca.org/blog_jack_2018_51 

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