Background
People are more likely to save when saving occurs automatically through mechanisms such as payroll deductions. Only about half of U.S. workers have access to an employer-sponsored retirement plan. Even fewer workers from groups that are discriminated against 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. 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 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) plans 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 Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 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 deductions at work. So-called Work and Save plans can take a variety of forms. One example is the Secure Choice plan offered by some states that are similar to the Auto IRA. Other states have established 401(k)-like 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 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 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.
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.