Three steps that could shore up retirement security

Strengthening America’s retirement system should have been a higher priority for years before 76 million baby boomers began to retire. From innovative 401(k) plan designs enabled by the Pension Protection Act of 2006 to one-stop investment solutions such as target date funds, government and industry have focused on helping workers save for retirement. But there’s still more work to do.

Today — two years since the first boomers turned 65 — the Employee Benefit Research Institute estimates that 49% of American workers are still “not confident at all” or “not too confident” about having enough money in retirement, 57% of pre-retirees have less than $25,000 saved for the future,  and 32% of all workers do not have access to a retirement saving plan at work.

These numbers, and similar studies, are widely understood. But these statistics are not the end of the story. They represent an opportunity to make changes for the better. We can give nearly all American workers a chance to improve their retirement preparedness.

Fortunately, participation and savings rates have increased significantly. Defined contribution plans, for example, have evolved successfully for millions of participants, but not all.401k If you define retirement success as the ability to replace current income in retirement, Putnam’s Lifetime Income Score survey shows that millions are on track for success. Those best prepared share several traits: They actively participate in a workplace savings plan, have worked with a financial advisor, and have higher deferral rates. This data supports the idea that behavior fundamentally influences preparedness. We need to encourage more successful behavior from more and more workers. In short, we can fix whatever is not working with 401(k)s by using what is working well with 401(k)s.

Here are three key steps to ensuring retirement security for all:

  1. Full-auto approach for all workplace savings. Make the best practices endorsed by the Pension Protection Act of 2006 the new norm for all workplace savings plans. A full-auto approach means all automatic features — automatic enrollment, re-enrollment, escalation, and default to qualified funds —  for all workplace savings plans.
  2. Access to workplace savings for all workers. Any worker paying FICA taxes should have access to a retirement savings plan at work. Let’s support the Auto-IRA — a bipartisan idea that was re-introduced into Congress this year — requiring all employers to offer, at a minimum, a payroll-deduction IRA with an opt-out provision for workers.
  3. Raise the bar on deferral rates. The Lifetime Income Score survey found that the most successful savers — the individuals on track to replace 100% or more of current income in retirement — are those actively participating in a savings plan at work and saving 10% or more of their salary. Indeed, sluggish wage growth deters workers from saving more. But workers should be encouraged to set realistic expectations about retirement, and auto-escalation can help them achieve their retirement savings goals.

With these actions, we could make significant progress in giving workers the chance to save for successful retirements. The infrastructure that exists today represents a combination of ideas from the retirement industry, private individuals, advocates, and public policymakers. It is a joint effort like this — in a coordinated, full-court press — that is needed to take America’s retirement savings system to the next level.

3 Responses to Three steps that could shore up retirement security

  1. BenefitJack says:

    Certainly agree with the embrace of automatic features. However, auto-IRA legislation, like other employer mandates, are not a solution. There are better answers that are much more consistent with worker’s needs and abilities. Unfortunately, investment professionals and 401(k) recordkeepers, and those who write associated regulations as well as those with legislative proposals (see Hatch for example), miss the boat.

    The solution is out there, in plain view … if we only took time to match plan designs with worker needs and abilities.

  2. Keith Gormezano says:

    If you want to encourage people to save for retirement, you need to make it simple.

    Why do we have several different confusing methods to save (Regular IRAs, Simple, SEP, Roth, 401(k)s, and defined benefit plans to name a few)?

    Just say that every dollar you put in a retirement plan with no upper dollar limit or income limit is pretax.

    When you withdraw the money, you are not taxed on it up to the poverty income level for the first part and regular income tax rates for the remainder.

  3. Rick Mayhew says:

    The beauty of social security is, people can’t get to it until a certain age and then only monthly. No lump sums. Most other plans permit early access with penalties. Even with auto-enrollment, if people can access the money, some will. My first company had a profit sharing plan that was only accessible when you retired or quit the company. Several left the company just to access the money.

    My thought is to create a Special 401(k) with auto-enrollment and no access until the person starts drawing social security. In other words, lock it up. Give an extra tax deduction for the first 5%. Instead of deducting 5% from income reported, give a “bonus” of 20%. Let the deduction be 1.2% on 1%. 1.4% on 2%. So you would be able to deduct 6% when you made a 5% contribution. Bill it as “Free money from the government!” (To parody a late-night infomercial) Then, add a lottery kicker where everyone in the plan gets a chance to win $1 million annually. I know it sounds a little crazy, but the folks at this level are not the MBA group. They need “free money,” excitement and a lockup to keep them from accessing the account early.