Auto Enrollment Retirement Plans are Here

“Americans aren’t saving enough for retirement and nearly half of people 55 and older have nothing saved for when they stop working. Government Accounting Office

Nearly one in four working-age Americans aren’t saving for retirement, and those who are say they aren’t saving enough, according to a PwC analysis. Further, a majority (55%) said they either are not participating in a workplace sponsored retirement plan like a 401(k) or they don’t know if they are in a plan.

The Government Accountability Office reports that nearly half of people 55 and older have nothing saved for when they stop working, meaning there is a building retirement-savings crisis and a wave of future retirees threatens to overburden an already fragile Social Security Administration. Consequently, this can upset a balanced economy that relies on older Americans spending money in the housing and health-care sectors.

Auto-enrollment retirement plans

Auto-enrollment and auto-escalation programs implemented by a few states have proved successful at closing that gap, particularly for workers in retail and service sectors of the economy. These sectors in the past have rarely offered retirement benefits to low-income staff.

In fact, plans that used automatic enrollment had a 92% participation rate in 2020, compared with 62% for plans with voluntary enrollment, according to Vanguard’s “How America Saves 2021” research. And, employees who worked for firms with automatic enrollment saved more than 50% more for retirement in 2020 than those employed at firms with voluntary enrollment.

Further, research shows that participants enrolled in a plan with automatic increase save, on average, 20% to 30% more after three years in the plan, compared with participants in an automatic enrollment plan that does not automatically increase participants.

As a result, Congress is proposing a Federal mandatory framework for workplace retirement plans. Starting in 2023, the retirement saving plan would require employers with more than five workers to automatically enroll new hires for retirement benefits, the contributions to which would automatically increase over time.

In short, businesses would automatically deduct 6% of new workers’ income into a low-cost retirement plan and automatically escalated that contribution to 10% over time, unless workers themselves opted for something different.

It’s mandatory for employers, but not their employees, who can choose to opt out of the savings plan or change their contributions. But the default choice would always be to signup, essentially making retirement funds a statutory benefit like unemployment or workers’ compensation insurance.

Failure to provide a low-cost retirement option such as a 401(k) or individual retirement account would cost a business an excise tax liability of $10 for every worker per day of noncompliance, which would add up.

Over the last two decades, continued adoption of automatic solutions has increased employee savings and the use of professionally managed allocations. Thoughtful retirement plan designs are helping people save and invest for retirement.

References:

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