Experience has demonstrated that people are more likely to save when saving occurs automatically, through methods such as payroll deduction. Since only about half of U.S. workers—and even fewer workers from racial and ethnic groups that have experienced discrimination—have access to an employer-sponsored retirement plan, some proposals would require employers to facilitate workers’ retirement savings. In contrast to their extensive role when sponsoring a retirement, employers would act instead simply as a conduit for the funds. As a result, participation and savings rates could increase substantially without burdening employers. Proposals for retirement savings vehicles of this type include the following:
Automatic individual retirement accounts (Auto-IRAs)—the experience with auto-enrollment in some 401(k) plans has shown that requiring people to opt out, rather than opt in, can boost enrollment rates tremendously. The Auto-IRA builds on this finding by extending the automatic enrollment mechanisms to individuals whose employers do not offer any savings plan. One leading Auto-IRA proposal would give employees the opportunity to contribute to an IRA through payroll deductions if their employer meets three conditions: It must have more than ten workers, have been in operation for at least one to two years, and have not yet sponsored a retirement plan for its employees.
The Auto-IRA would not require any employer contribution. Employers would not be responsible or liable for investment decisions provided the employer did not select the investment options. They would receive a temporary tax credit for each employee who participates to offset the employers’ cost of allowing workers to save for retirement through payroll deduction. Employees would have contributions deducted automatically from their paycheck unless they expressly opt out.
Work and Save plans—several states have established programs intended to increase the proportion of employees with the opportunity to save for retirement through payroll deduction at work. So-called “Work and Save” plans can take a variety of forms. “Secure Choice” plans are similar to the Auto-IRA, whereas other states have established 401(k)-like Multiple Employer Plans (MEPs) or marketplaces where small businesses can select a plan from a variety of pre-screened options.
Supplemental accounts—the federal government could provide a universally available 401(k) plan for workers whose employers do not already provide a savings mechanism, as well as for the self-employed and other workers without access to such a program. It could offer a limited number of investment options in order to reduce costs. The need for such a plan would undoubtedly depend on the eventual popularity and coverage of state-facilitated plans.
EMPLOYER-FACILITATED RETIREMENT SAVING: Policy
Increasing retirement savings options
Automatic individual retirement accounts
Congress should pass legislation establishing an Auto-IRA and resolve the technical issues that will allow this vehicle to realize its full potential.
Work and Save plans and universal 401(k)s
AARP strongly encourages states to establish state-facilitated savings arrangements that will increase employee participation in retirement plans. Where possible, plans should use features such as automatic enrollment and payroll deduction, low-cost diversified default investments, adequate default contribution levels, automatic escalation of contributions, and periodic or guaranteed lifetime income payments.
Policymakers should create and expand supplemental individual retirement savings accounts that would enable workers to accumulate retirement savings in addition to Social Security’s guaranteed benefits. The accounts could be sponsored by either public or private entities. All workers should be able to participate voluntarily through payroll deductions that employers would be required to honor.
Supplemental individual retirement savings accounts should include strong spousal protections, including for surviving and divorced spouses. These protections should mirror, as much as possible, the spousal protections for Social Security and traditional defined-benefit pensions.