Digital Pocket Change? Employees May Be Too Ready to Rely on Money Saving Apps

The rise in digital pocket change apps can be a plus for plan sponsors who want to help educate employees about savings. Plan Sponsors may find that preparing information for employees that distinguishes these apps to be ultra-helpful to employees.

About every fifth advertisement I see on YouTube gives a pitch for Acorns, a “microsavings app” that moves small amounts of money, the equivalent of digital pocket change, into investment accounts.  Many round up a purchase to the next dollar (a $1.50 coffee becomes $2). The pitch is strong. So strong that celebrities may even state that not using Acorns is a mistake. In fact, we covered apps like Acorn back in 2018.  Since then, plenty of new microsavings apps have popped up.

Most of the microsavings or micro-investment apps operate the same way. For a rundown on those apps, try reading this NerdWallet article. To generalize, micro-savings apps take small amounts from a bank account, usually associated with a debit card, and move that cash to an investment account. Often those apps operate in a fee free world, but others run on small fees like $1 a month for accounts less than $5000 (or a percentage of funds invested for higher balances). The investment strategy is set by a quick formula (age + goals) and then spun into a robo-investment platform. Poof: Retirement planning done.  

The upside to these apps seems to be that someone has finally managed a “small” small enough to actually get people to “start small”.  In fact, Acorns claims 3.5 million people use the app. As a side bar, that means Acorn’s digital pocket change amounts to a $42 million per year in fees collected.  But the small isn’t without its problems, and plan sponsors may want to review these apps with their employees for a variety of reasons.  Here are a few.

Emergency savings in a not so liquid form. Some of the micro-savings apps are investment apps and others are savings apps. And that’s the problem, it’s hard to tell. Investment and savings are not the same when it comes to emergencies and unplanned expenses. While some advice out there suggests borrowing from 401(k)s others shy away from it.  And those with the smallest amount to invest may be the ones who most need emergency accounts to be robust.  A study by the Federal Reserve in 2017 found at more than 40% of Americans couldn’t come up with $400 for an emergency. And, importantly, many of the micro-savings apps are actually micro-aggregators: that is, they aggregate small amounts of funds into accounts, but don’t offer interest (like a typical savings account).

Using that debit card too frequently. For some folks, whipping out of the debit card too frequently is not the best budgeting option.  For them, using a debit card regularly may result in overspending.  As this Investopedia articledescribed it, “only carrying the cash you are prepared to pay for a given product will prevent you from buying the next level up and paying for features you don't need.” Just as many employees may need to prioritize saving over investing, even investing digital pocket change, some employees may need to avoid relying too heavily on using their debit cards. Any incentive to use the debit card, like having purchase amounts rounded up to the next dollar may be inappropriate.

“Saving Money Without Thinking About It.” Just as gyms make money by automatic membership payments without actual gym visits, the micro-savings apps build savings by automatic payment. It’s the set it and forget it idea. But savings shouldn’t be automatic or thoughtless. In fact, the process of budgeting and saving requires a level of mindfulness. For most people, each week brings a slight nuance to the budget. Balancing a budget requires continual attention to it. Learning to save involves learning to plan. Finding a way to start saving isn’t the end of the saving process, instead, it should be the beginning. They can be a starting point for people to learn that saving is possible, and then gradually and appropriately for each family, move up from there.

The rise in digital pocket change apps can be a plus for plan sponsors who want to help educate employees about savings. Plan Sponsors may find that preparing information for employees distinguishing these apps based on their different terms can be ultra-helpful for employees.  This information could include which ones help with investing versus saving, the fee structure, and information about over-using debit cards.  

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