Harvard Law School Class Shines Light on Importance of Emergency Savings

Harvard Law School Class Shines Light on Importance of Emergency Savings

Friday, May 15, 2020

COVID-19 is fundamentally changing how public and private sector actors alike approach financial security. Previously unthinkable policies like the CARES Act have passed through Congress. Private sector employers are exploring new ways to connect their workforce with financial resources, keep employees on their health insurance, and support community organizations. With the country facing cataclysmic economic effects, it is more important than ever to bring diverse partners to the table and think big about how to address both immediate financial need and ongoing, structural barriers to financial security.

A Nationwide Lack of Emergency Savings

The nationwide lack of emergency savings is one ongoing barrier that has gained new urgency. Millions of Americans were laid off in April, and 39% of them cannot muster $400 of liquidity in a financial emergency. With this loss of income, and without a savings buffer to cushion the blow, more and more people will struggle to pay bills and purchase essentials. The CARES Act takes some steps towards providing much-needed liquidity, but the relief it brings is only temporary. It was built to address the current and pressing economic crisis, not the ongoing emergency savings crisis that began long before this pandemic and will still be present after.

Over nearly two decades, Commonwealth’s work and that of others has repeatedly shown that building small-dollar, liquid savings is the first important step to financial security. As an industry expert in BlackRock’s Emergency Savings Initiative, Commonwealth has worked with corporate partners and fellow industry experts to generate momentum to address the emergency savings crisis. The Initiative works with a diverse set of employers, financial services companies, and fintechs to develop new emergency savings solutions via test-and-learn interventions and scale these solutions through new channels. 

A few months ago, Commonwealth partnered with Professor Howell Jackson’s fintech class at Harvard Law School (HLS) to explore new pathways for lower- and moderate-income families to build emergency savings. The collaboration culminated in the publication of an HLS case study, which can be used by law schools across the country to teach students about financial, legal, and regulatory frameworks, with Commonwealth’s work serving as a real-world example.

Commonwealth’s Partnership with a Fintech HLS Class

In the spirit of creative collaboration, Commonwealth worked with the class to explore new pathways to dramatically increase access to emergency savings for low- to moderate-income families. The class was designed by Jackson and Margaret Tahyar, law partner at Davis Polk, to introduce law students to the legal considerations around emerging financial technologies. Commonwealth’s team worked with the course organizers to develop the case around the potential legal questions faced by employer-sponsored emergency savings solutions. 

The case considers a set of approaches towards working with fintech partners and the legal and regulatory factors at play. These approaches include a highly-integrated fintech solution, in which payroll systems would allow employees to automatically deduct money for savings from each paycheck, and retirement sidecar savings accounts, where retirement plan recordkeepers allow employees to fund a liquid savings account through after-tax pay as part of their 401(k) program.

The Role of the Legal Industry in Emergency Savings

The case illustrates that lawyers can help businesses navigate the legal and regulatory considerations of offering emergency savings benefits. By doing so, they help employers know what is feasible, confidently evaluate their options, and find the solution that is best for them.

Lawyers working specifically within fintech also have the opportunity to push for innovative features and tools that build financial security. Fintech is just beginning to explore how it can better serve and deliver emergency savings tools, but early results suggest that companies can effectively develop a double bottom line of profit and social impact. Fintechs can help develop a system that supports emergency savings–benefitting both the users and the fintechs themselves. Having legal counsel well-versed in the legal considerations around new financial technology is key for organizations looking to take advantage of this opportunity.

Working with Partners to Increase Emergency Savings for Millions

These perspectives are vital to our work, particularly as we engage with retirement plan record keepers and payroll providers in developing emergency savings solutions. We need collaborative, innovative approaches to address barriers both big and small. The economic impact of COVID-19 has only amplified this work’s importance. 

As Commonwealth continues to move forward its vision to make financial security and opportunity possible for all, working with partners is critical to scaling solutions and changing the financial landscape for millions of financially vulnerable people. This work begins with discussions like the one we had with Professor Jackson’s class: engaging new stakeholders, mapping out potential ideas, and figuring out how to turn those ideas into real-world solutions as quickly as we can, especially given the urgency of the moment. 

To learn more about partnering with BlackRock’s Emergency Savings Initiative to improve financial security and opportunity through emergency savings, contact Catherine Wright at info@buildcommonwealth.org.

BlackRock’s Emergency Savings Initiative

BlackRock announced a $50 million commitment to help millions of people living on low- to moderate-incomes gain access to and increase usage of proven savings strategies and tools—ultimately helping them establish an important safety net. The size and scale of the savings problem requires the knowledge and expertise of established industry experts that are recognized leaders in savings research and interventions on an individual and corporate level. Led by their Social Impact team, BlackRock is partnering with innovative industry experts Common Cents Lab, Commonwealth, and the Financial Health Network to give the initiative a comprehensive and multi-layered approach to address the savings crisis. UPS, Uber, Mastercard, Etsy, Brightside, Arizona State University, and Acorns have joined BlackRock’s Emergency Savings Initiative to help their employees, customers, gig workers, and college students take the essential first step towards long-term financial well-being.