United Parcel Service Inc. announced on Thursday a plan to offer its 100,000 of its workers a way to save for emergencies within its 401(k) plan, becoming one of the largest U.S. employers to join a trend that reflects concern over the impact of workers’ financial problems on their ability to retire. The program gives UPS employees the option to divert a portion of their paychecks into rainy-day funds within their 401(k) plans.
Eligible employees can elect to contribute up to 5% of pay to the emergency account. Employees can invest the money in the same options the 401(k) offers. When an employee taps the emergency account, the contributions come out tax-free. Earnings on after-tax contributions are subject to income tax and, if the employee is younger than 59 ½, a 10% penalty.
Future Wealth’s View
Is there anyone who thinks this is a wise move for the employee? First of all, an emergency fund should not be invested in the stock market like 401K investments. It should be in a savings account at the local bank. Second of all, if it is invested at all, it should be in a liquid treasury account that can be liquidated when needed with no penalties. Third and most importantly, it should not be mingled with investments in a retirement account.
Why is Blackrock offering such a plan for UPS employees? Simple answer is greed. By getting the UPS employee to take money from his or her paycheck and put it into a 401K type investment for Blackrock to manage, they get to charge a management fee. For the employee, it is simply a bad deal. They pay a management fee but they cannot get the earnings from the appreciation without paying a penalty. Which is what Blackrock is counting on. There is a penalty to withdraw the emergency fund and so, the employee may be averse to withdrawing from the fund – giving it a new meaning to emergency funds.
This is simply wrong at many levels. But, at the most basic level, emergency funds should not be subject to management fees or penalties by banking institutions. Just when you think the big banks have run out of ways to siphoning people’s money, they find another way to get into your wallet and mess up your life.