People are more likely to save when saving occurs automatically through mechanisms such as payroll deduction. 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 deduction 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 IRA builds on this finding by extending the automatic enrollment mechanisms to individuals whose employers do not offer any savings plan.
Auto IRAs would not permit any employer contributions. Employers would not be responsible or liable for investment decisions. They would receive a temporary tax credit 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 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 programs: Several states have established programs intended to increase the proportion of employees who can save for retirement through payroll deduction at work. Such programs can take a variety of forms. One example is the automatic IRA or Secure Choice model offered by some states like Oregon, California, and Illinois. Other states have established 401(k)-like MEPs or marketplaces where small businesses can select a plan from a variety of pre-screened options. Voluntary individual retirement accounts (voluntary IRAs) would function similarly to an auto IRA, but would not require employers to offer access to the program to their employees. Interstate collaboration is another option, where states could work together to offer access to a Work and Save program.
Supplemental accounts: The federal government could provide a universally available retirement savings plan for workers whose employers do not already provide a savings mechanism. Such accounts could also be offered to people who are self-employed. Similar plans could also allow people to save so that they could delay taking their Social Security benefits or to supplement their benefits. These are known as supplemental accounts because they operate in addition to Social Security. These plans could be structured to 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 other types of savings plans.
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 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
States should establish state-facilitated savings arrangements that will increase employee participation in retirement savings options. Where possible, programs 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. 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.