Workers are struggling to save for retirement, and the future is filled with uncertainty about whether their savings will be enough even to pay for basic expenses.
A proposal to automatically enroll workers currently without a workplace savings plan like a 401(k) into an Individual Retirement Account (IRA) is one idea that could boost savings significantly.
Introduced by Congressman Richard Neal (D-MA) in the House, with a similar proposal from Senator Jeff Bingaman (D-NM) in the Senate, the Automatic IRA Bill would require companies to make automatic payroll deductions of 3% into Roth IRAs for workers who do not have access to workplace savings plans. Employees would be automatically enrolled unless they choose to opt out. Senator Bingaman’s bill offers a gradual phase-in for smaller businesses, with the first year’s rules applying only to firms with 100 or more workers. Congressman Neal’s proposal would apply to firms with 10 or more employees.
Currently, 78 million American workers — about half the workforce — do not have an employer-sponsored retirement savings plan. The Retirement Security Project has estimated that the Automatic IRA proposal could raise savings by nearly $8 billion annually.
Automatic enrollment, auto escalation, and other automatic features have helped to combat investors’ inertia and led to more savings since the enactment of the Pension Protection Act in 2006. The retirement industry has worked diligently to educate investors about saving for retirement, but our research has found that participation and savings rates have likely reached a plateau. With so many Americans without access to workplace savings, a program with automatic features is needed to move retirement savings over the goal line for many workers.
Studies have demonstrated that automatic features associated with 401(k) plans, for example, have resulted in higher participation rates and increased contributions. Last fall, the Government Accountability Office reported that automatic enrollment “appears to significantly increase participation in 401(k) plans.” Other studies cited by the GAO report found that participation rates in defined contribution plans can reach as high as 95% with auto enrollment.
The use of auto enrollment with 401(k) plans is increasing among many companies, and may become the norm. A Towers Watson survey released this year estimated that 57% of firms automatically enroll workers in 401(k) plans. And once workers start saving, they tend to adjust very quickly to their budget and continue to contribute.
Given the current economic environment and outlook for the ultimate insolvency of Social Security, it’s critically important that our political leadership support tools, programs, and solutions for the current retirement savings challenge. What that adds up to is a higher likelihood of success for investors trying to meet their retirement goals. And it’s the right thing to do.
