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 US 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 workersʼ retirement savings. Employers would act as a conduit for the funds rather than as a plan sponsor, so that participation and savings rates could increase substantially without burdening employers. Several proposals for retirement savings vehicles of this type are described below.
Work and Save plans—Work and Save plans would make retirement savings accounts available to small private-sector employers and their workers who now lack such plans. Their low costs, transparent fee structure, and limited administrative burden would appeal to employers that cannot afford to offer a conventional plan. And their low fees and automatic payroll deductions would make saving for retirement more attractive to low- and moderate-income workers, who are most in need of help in paying for retirement. To date, five states have passed Secure Choice plans that are similar to the federal Automatic IRA (see below), while two others are establishing marketplaces where small businesses can select a plan from a variety of pre-screened options. Several other states are actively exploring taking similar actions.
Universal 401(k)s—another proposal would have the federal government 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 should have 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-by-state plans.
Automatic individual retirement accounts (Auto-IRAs)—Auto-IRAs build on the effective payroll deduction method used for employer-provided plans by extending similar automatic mechanisms to individuals whose employers do not now 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, which would not be responsible or liable for investment decisions, would receive a temporary tax credit for each employee who participates. This would offset the employers’ cost of allowing workers to save for retirement through the payroll deduction process. Employees would have contributions deducted automatically from their paycheck unless they were to expressly opt out. 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.
Annuitization—the decline in coverage by traditional defined-benefit plans is contributing to a decline in the share of retirement income that is annuitized. As a result more and more Americans are at risk of having retirement nest eggs that will not last their entire lives.
Employer-Facilitated Retirement Saving: Policy
Work and Save plans and universal 401k's
AARP strongly encourages states to establish state-facilitated savings arrangements that will improve participation of employees 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.
Automatic individual retirement accounts (Auto-IRAs)
Congress should pass legislation establishing an auto-IRA and resolve the technical issues that will allow this vehicle to realize its full potential.
AARP supports the creation and expansion of 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 be accompanied by 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.
Options for increasing the share of retirement wealth that is annuitized should be carefully assessed.