The time is right for a national retirement savings plan
A mandatory plan for workers lacking access could make saving as universal as Social Security
Experts on retirement saving have plenty of ideas for making 401(k) plans work better. But most agree on the top priority: get these accounts into the hands of more people.
Only about half of private-sector workers are covered by an employer-sponsored retirement savings plan at any given time—and that figure hasn’t budged much over the years. The lost opportunity to save at the workplace translates into far too many people retiring with paltry savings or none at all, leaving them reliant only on Social Security in retirement.
But what if we could make retirement savings accounts as universal as Social Security, which covers nearly all U.S. workers? That could be done with a federally sponsored retirement plan that would automatically enroll all workers who don’t have access to a workplace savings plan.
Policymakers and lawmakers have tried to advance such a plan, including:
The equivalent of a national 401(k) plan, which would feature a matching contribution from the government.
A national version of the “auto-IRA” plans that have been enacted by 17 states. This would be similar to the 401(k) idea but wouldn’t include a matching government contribution.
In both cases, most employers who don’t offer their own plans would be required to enroll workers in the government option and to make payroll deductions.
In my latest Morningstar column, I explore both of these ideas, and also update the progress on “multiple employer plans,” a sort of shared platform that aims to incentivize participation by reducing administrative and fiduciary burdens for individual small employers.
401(k) matching contributions: Are they really all that?
When you’re saving for retirement in a 401(k) account, the standard advice is to contribute enough to capture your employer’s matching contribution. That makes sense, since the contribution represents a risk-free 100% return on every dollar you save.
The match is intended to be an incentive that encourages saving - but recent research shows that there are better ways to get people to sock away their money. And in many cases, the current structure of matching programs actually contributes to pay inequity.
“When we first created an employer match, we thought that was the carrot - the incentive that would get people to participate,” says Fiona Greig, global head of investor research and policy at Vanguard and co-author of a recent research brief on matching contributions. “But now we have a much heavier hammer.” That hammer, Greig says, includes the rise of plan features like auto enrollment, auto escalation of contribution rates and higher initial default contribution rates. “These are the things that, without opening your eyes or engaging in any way, cause people to participate and save more over time,” she adds.
Matching contributions are a big, expensive feature of the 401(k) system. Vanguard notes federal government data showing that employers contributed $212 billion to defined contribution retirement plans in 2021 - about 58% of all dollars saved.
Vanguard, one of the nation’s largest administrators of 401(k) plans, evaluated more than 1,300 large retirement plans that the firm administers. The research doesn’t conclude that employers should stop matching employee contributions - far from it. But it did find that employee saving rates don't vary much across plans with different levels of employer matches.
In my latest Reuters column, I explore the plus-minus of matching contributions, and the impact of automatic enrollment.
What I’m reading
How one man lost $740,000 in savings to scammers targeting his retirement savings . . . Some seniors readily step back but others never will . . . Using your retirement account as an ATM just got easier . . . The IRA rollover mistake that costs savers billions . . . Medicare turns 59 this week; what still needs to be done to improve the program?