Retirement Download
Strategies for a successful retirement
SECURE 2.0's Emergency Savings Options Remain Underused in Retirement Plans
The emergency savings features introduced under the SECURE 2.0 Act were designed to help workers handle short-term financial shocks without derailing their long-term retirement goals. Yet early data suggest these tools are seeing limited traction.
From the little-used $1,000 penalty-free emergency withdrawal option to the near absence of pension-linked emergency savings accounts (PLESAs), most employers and participants are sticking with more traditional approaches.
For retirees and near-retirees, this trend underscores some important points:
Limited Adoption of the $1,000 Emergency Withdrawal Feature Only about 4% of 401(k) plans analyzed by Vanguard allow participants to take a penalty-free withdrawal of up to $1,000 per year specifically for unexpected expenses (with the option to repay it over three years to preserve retirement savings). This is despite the provision being available since 2024. Many plans (around 94% as of earlier data) already permit hardship withdrawals for serious needs, so this new targeted option hasn't added much novelty for most employers or participants. Low usage makes sense—only 0.4% of eligible participants actually took one in 2025.
Pension-Linked Emergency Savings Accounts (PLESAs) See Almost No Interest SECURE 2.0 also allowed employers to add "sidecar" emergency savings accounts directly within the 401(k) plan. These are funded with after-tax (Roth-style) contributions, capped at $2,600 for 2026 (adjusted for inflation), and count toward the overall annual 401(k) limit of $24,500 (plus catch-up amounts: $8,000 for age 50+, or higher "super catch-up" for ages 60-63 in some plans). Vanguard describes interest from employers as "minimal to no," and many providers (including Vanguard itself) aren't even offering them due to complexity and limited demand. Issues include administrative hurdles, like excluding highly compensated employees (over roughly $160,000), fluctuating incomes making compliance tricky, and liquidity concerns—accessing funds from inside a 401(k) can take days.
Why the Hesitation? Employers Prefer Simpler Alternatives Instead of tying emergency savings directly to retirement plans, many companies opt for external accounts through payroll deductions at FDIC-insured banks. These are easier to set up, more accessible (quicker withdrawals), and open to all employees without IRS restrictions. Research from groups like the Employee Benefit Research Institute shows over half of larger firms offer some form of emergency fund support, often this external route. For those of us in or nearing retirement, this separation helps protect long-term nest eggs from being treated as short-term piggy banks.
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Broader Context for Retirement Security
Building and keeping emergency savings remains tough for many households—even as inflation has cooled. Prices are still up significantly since 2020, and surveys show only about 47% of people could cover a $1,000 surprise expense with cash on hand. Financial advisors still recommend 3–6 months of living expenses in liquid savings.
For retirees or those close to it, these low-adoption trends reinforce a key lesson: Prioritize separate emergency funds outside retirement accounts. Dipping into 401(k)s or IRAs (even with new flexibilities) can trigger taxes, penalties (if under age rules), or lost growth potential. The goal of SECURE 2.0 was to reduce leakage from retirement savings due to emergencies, but real-world uptake shows most prefer keeping things separate.
There are ongoing discussions in Congress (like the proposed Emergency Savings Enhancement Act) to make these in-plan options more appealing by raising limits and removing restrictions. But for now, the message is clear: Focus on building dedicated emergency cash reserves to safeguard your retirement lifestyle. If you're reviewing your own plan or advising family members, these Vanguard insights are a good reminder that not every new rule gets widely embraced—especially when simpler paths exist.
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