Last February, I asserted that “access isn’t the issue, prioritization is.” I should have said, “Coverage isn’t the issue,” and that the Individual Retirement Account is more than adequate. Access is an issue, just a different kind of access; access as liquidity without leakage along the way to and throughout retirement.
A recent 401(k) Specialist article titled “How to Address Racial Disparities in Retirement Savings,” noted that: “just 41% and 35% of Black and Hispanic families, respectively, had any retirement savings in 2016, compared to 68% of white families.”
A more recent report from the Employee Benefits Research Institute includes the 2019 Survey of Consumer Finances data and confirms the continued disparity in households who have Individual Account (IA) retirement savings.
However, because there are many more white households, the number of white households who have no individual account retirement savings far exceeds the number of Black and Hispanic households without savings, combined.
Number of American Households (2020)
401(k) Specialist reported on a proposal from the Economic Innovation Group (EIG) that recommends extending the federal employees Thrift Savings Plan (TSP) (or a plan modeled after TSP) to workers who do not currently have access to an employer-sponsored plan. The folks from EIG apparently agree with me that the “coverage” solution the IRA offers is inadequate. The related EIG analysis notes that:
“… A TSP-like plan is suggested mainly for its automatic enrollment and matching contributions provisions, which are proven to increase coverage and participation. …” (Emphasis mine)
The impact of automatic features, employer financial support
Data abound that confirm saving for retirement is less among workers who are younger, have lower wages, and have less tenure (regardless of race, ethnicity, or gender). Vanguard produces an annual report of 401k plans. Almost all of those plans offer employer contributions. Many deploy automatic features – although most limit those features to new hires. Consider the participation and contribution differences between plans with voluntary versus automatic enrollment:
Age: Participation among workers under age 45 is 50+% higher in plans with automatic features:
- Under age 25: 20% voluntary, 84% automatic
- Age: 25 – 34, 55% voluntary, 93% automatic
- Age: 35 – 44, 67% voluntary, 93% automatic.
Wage: Participation for those earning less than $50,000 is 50+% higher in plans with automatic features:
- Income: < $15,000, 22% voluntary, 74% automatic
- Income: $15,000 – $29,999, 36% voluntary, 83% automatic
- Income: $30,000 – $49,999, 57% voluntary, 90% automatic.
Tenure: Participation is 50% higher among workers with less than 7 years of service:
- Tenure: 0 – 1 years, 35% voluntary, 87% automatic
- Tenure: 2 – 3 years, 52% voluntary, 94% automatic
- Tenure: 4 – 6 years, 65% voluntary, 95% automatic.
Sex: Both male and female participation rates increase significantly once automatic features apply:
- Male: 61% voluntary, 92% automatic
- Female: 64% voluntary, 92% automatic.
Plans with automatic features have a slightly higher average contribution rate (employer and employee combined):
- Automatic: 11.4%
- Voluntary: 10.5%.
However, if you include eligible, non-participants (those who do not contribute), plans with automatic features have average contribution rates (ADP and ACP combined) that are 57% higher.
- Automatic: 10.7%
- Voluntary: 6.8%.
Most employer-sponsored plans do not capture participation and contribution data based on race, ethnicity, or gender. While the Vanguard study doesn’t specifically report data based on race and ethnicity, the 92% participation rate in plans with automatic features likely means choice architecture is effective at prompting participation regardless of race or ethnicity. Other studies also confirm automatic features can reduce disparities.[vi] Why? Because most employer-sponsored plans offer employer financial support as an incentive as well as access to savings prior to retirement.
Uncertainties surrounding the EIG proposal
The EIG proposal leaves some questions unanswered, including:
- How will automatic enrollment be conducted?
- Who will pay the administrative costs?
- Who will pay for the changes in payroll systems/processes among the hundreds of thousands of employer payroll systems?
- Will participants in this TSP-like plan have all the same privileges (loans, withdrawals, etc.), and
- Will participants in this TSP-like plan be treated as “separated” individuals – will they have the option to withdraw those funds, roll them to an IRA, or, to an employer-sponsored plan should they become eligible?
However, perhaps the most challenging question is who will bear the financial impact from TSP-like matching contributions? I suspect proponents may have targeted either some sort of employer-mandate or a reduction in the “tax expenditures” for employer-sponsored retirement savings plans as a means to finance a matching contribution. That would likely disrupt tens of millions of American households who are already saving for retirement and accumulating household wealth.
Most important, where EIG goes awry, is the thinking that the TSP-like retirement savings plans are some kind of entitlement. They aren’t. TSP is one of the rewards for working for the federal government – like salary, health coverage, etc.
A better, less expensive and less disruptive solution exists
The optimal solution to increase the number of households who are saving for retirement and accumulating wealth, regardless of race, ethnicity, or gender, would leverage existing systems and products without adding new taxes or entitlements and without disrupting the tens of millions of American households who are already saving for retirement.
Without changing current tax preferences and rules that apply to the Individual Retirement Account and employer-sponsored retirement savings plans, including TSP, there is a better alternative to increase retirement savings and household wealth. It would:
- Be national in scope,
- Apply to all taxpayers with wage income, including those eligible for but not contributing to an employer-sponsored plan,
- Lower the cost savers incur in complying with existing federal mandates,
- Avoid disrupting existing employer-sponsored retirement savings plans (including the TSP),
- Incorporate automatic features similar to those proposed by EIG, yet
- Leverage existing payroll functionality that is already part of every employer payroll system.
Unlike EIG’s proposal, it would be certain to:
- Minimize participant-paid expense,
- Offer a greater choice of investments, and
- Anticipate worker “financial fragility” by offering a solution that provides:
- Financial education and other support,
- An everyday opportunity to prospectively increase or reduce savings,
- A “last clear chance” to forego allocating savings to a retirement account,
- Anytime access to prior contributions and accumulated earnings,
- A “prize-linked” financial incentive financed with savings on existing federal debt, and
- Anytime access to tax-favored “liquidity without leakage” along the way to and throughout retirement.
Yes, we can do better than state-mandated IRAs. No, we don’t need to disrupt employer-sponsored savings plans.
My comments are my own based on my past experiences in plan sponsor roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute
for) legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used, and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.
