Employer-Facilitated Retirement Savings

Background

People are more likely to save when saving occurs automatically through mechanisms such as payroll deductionReduction in the amount of income that is subject to tax. A dollar of a deduction reduces taxes by only a fraction of a dollar, as determined by the taxpayer’s applicable tax rate . Only about half of U.S. workers have access to an employer-sponsored retirement plan. Even fewer workers from historically disadvantaged racial and ethnic groups have such access. Some proposals to increase the proportion of workers who would be able to use payroll deductionReduction in the amount of income that is subject to tax. A dollar of a deduction reduces taxes by only a fraction of a dollar, as determined by the taxpayer’s applicable tax rate would require employers to facilitate workers’ retirement savings. In contrast to their extensive role when sponsoring a retirement plan, 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 these retirement savings vehicles 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 IRAA proposal to expand access to workplace-based retirement savings plans for people whose employers do not already offer a plan.  builds on this finding by extending the automatic enrollmentA feature whereby employees are enrolled automatically in their employer's retirement savings plan and must take action if they do not want to be enrolled. mechanisms to individuals whose employers do not offer any savings plan. One leading proposal would require an employer to offer Auto IRAs if it meets three conditions: It has more than ten workers, has been in operation for at least one to two years, and has not yet sponsored a retirement plan for its employees.

Auto IRAs 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 creditTax credits directly reduce the amount of taxes owed. for each employee who participates to offset the employers’ cost of allowing workers to use its payroll system to save for retirement.

Multiple employer plans (MEPs): MEPs are essentially a group 401(k) plan with simplified regulatory requirements for employers. They are also known as pooled employer plans. They allow unaffiliated employers to join together to offer a plan at a significantly lower cost than if each employer has its own 401(k). The 2019 Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act, enabled the creation of MEPs, with regulations going into effect in January 2021.

Work and Save plans: Several states have established programs intended to increase the proportion of employees who can save for retirement through payroll deductionReduction in the amount of income that is subject to tax. A dollar of a deduction reduces taxes by only a fraction of a dollar, as determined by the taxpayer’s applicable tax rate at work. Such plans can take a variety of forms. One example is the Secure Choice plan offered by some states that are similar to the Auto IRAA proposal to expand access to workplace-based retirement savings plans for people whose employers do not already offer a plan.  . Other states have established 401(k)-like MEPs or marketplaces where small businesses can select a plan from a variety of pre-screened options.

EMPLOYER-FACILITATED RETIREMENT SAVING: Policy

EMPLOYER-FACILITATED RETIREMENT SAVING: Policy

Increasing retirement savings options

Policymakers should encourage measures to increase individuals’ ability to save for retirement. Such savings should be in addition to, not instead of, the guaranteed benefits provided by Social Security.

Automatic individual retirement accounts (Auto IRAs)

Congress should pass legislation establishing an Auto IRAA proposal to expand access to workplace-based retirement savings plans for people whose employers do not already offer a plan.  and resolve the technical issues that will allow this vehicle to realize its full potential.

Work and Save plans and universal 401(k)s

States should establish state-facilitated savings arrangements that will increase employee participation in retirement plans. Where possible, plans should use features such as automatic enrollmentA feature whereby employees are enrolled automatically in their employer's retirement savings plan and must take action if they do not want to be enrolled. and payroll deductionReduction in the amount of income that is subject to tax. A dollar of a deduction reduces taxes by only a fraction of a dollar, as determined by the taxpayer’s applicable tax rate , low-cost diversified default investments, adequate default contribution levels, automatic escalationA feature whereby employees' contributions to their employer's retirement savings plan are increased automatically each year unless they opt out.  of contributions, and periodic or guaranteed lifetime income payments.

Supplemental accounts

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. Either public or private entities could sponsor the accounts. 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.