AARP has repeatedly asserted,[i] and others have embraced,[ii] statements such as: “Employees are 15 times more likely to save for retirement when they have access to a way to save at work, and 20 times more likely when they are automatically enrolled.”[iii]
Suggesting 15 times as many would save for retirement if only an employer offered “access to a way to save at work” is misleading at best[iv]; but more likely, paltering.[v]
The difference isn’t attributable to a lack of payroll deduction support. Some background:
- ~94% of workers are paid by direct deposit,[vi] and
- The 5% cited in the above exhibit comes from data that are almost 20 years old, limited to “moderate income” workers with wages between $30,000 and $50,000, and
- The Vanguard 2022 survey, How America Saves, confirms that only 57% of workers earning $30,000 to $50,000, annually, participate in voluntary enrollment retirement savings plans even though their plan is almost always a part of the worker’s total rewards, including employer matching contributions and various forms of tax-favored liquidity.[vii]
Almost all workers paid by direct deposit (including pay cards, etc.) can split their paycheck—diverting a portion of take-home pay to an Individual Retirement Account (IRA). Almost no one does.[viii]
The issue isn’t access to an adequate, tax-favored, retirement savings plan. Workers who are not covered by an employer-sponsored retirement savings plan have had access to a more than acceptable, tax favored, retirement savings plan since the passage of ERISA in 1974—the Individual Retirement Account (IRA). That is consistent access over the past 48 years.
Importantly, whether or not workers have had access to an employer-sponsored retirement savings plan in some or all years since 1982, all workers could have contributed to an IRA every year. Yet only 13% of wage earners (or their spouses) contributed to an IRA in 2020.[ix]
A median wage worker who reaches Social Security Full Retirement Age in 2023 was born in 1957 and reached age 25 in 1982. Had they voluntarily contributed the maximum to an IRA each year and achieved a 5% average annual rate of return, they would have nearly a 100% initial pay replacement upon retirement:
Unfortunately, some states suggest simple participation in their state mandated IRA will be sufficient for workers to maintain their pre-retirement standard of living.[x]
For many, the issue is the ability to save. And for many others, saving for retirement isn’t a current financial priority. More background:
- ~72% of workers would have some or significant difficulty meeting their everyday financial obligations if their next paycheck was delayed (delayed, not missed) and delayed (only) one week![xi]
- Through October 28, 2022, Americans have filed 164+ million (MM) 2021 tax returns (151+MM were filed electronically), the Internal Revenue Service has issued 108+ MM refunds, and 99+MM were direct deposited, averaging $3,253.[xii]
- Many Americans prefer to receive an income tax refund instead of slightly increased paychecks, or in allocating those “savings” each payday to an IRA or an employer-sponsored plan.[xiii]
- According to Vanguard, 31% of workers who participate in an employer-sponsored 401k plan fail to contribute enough to receive the full employer matching contribution.[xiv]
Many workers are in debt, living paycheck to paycheck. At the same time, based on historical tax refunds, many could save by redirecting excess tax withholding.
Conclusion
A 20X, 15X, 12X greater level of savings won’t occur simply because a worker can “access to a way to save at work.” The greater level of participation is almost entirely a function of features now commonplace in employer-sponsored 401k plans, including but not limited to:
- Automatic enrollment, automatic escalation, automatic investment,
- Tax-favored liquidity,
- Extensive communications and marketing materials, and
- Behavioral economics concepts, and processes—which not only prompt participation, but reinforce participation by socializing savings, highlighting employer support, and confirming the plan is part of the total rewards package.
Without those value-added features commonplace in today’s 401k plans, actual experience with payroll-deducted IRAs shows that simple “access to a way to save at work,” with voluntary enrollment and without the automatic enrollment and escalation mandates, would be much more likely to match my experience in 1982 and the federal government’s experience with MyRA less than a decade ago—where almost no one enrolled.[xv]
Based on my decades of experience, participation and contributions increase as “effective access” increases—with or without “access to a way to save at work.”[xvi]
I am always interested in your thoughts, comments, and criticisms. jacktowarnicky@gmail.com
Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.
Disclaimer No. 2: 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.
MORE FROM JACK TOWARNICKY:
• Most Young People Should Not Save For Retirement in Their 401k
• State-Run IRAs Are Similar, and Suboptimal: Opinion
[i] AARP, Retirement Savings Models, 2/15/21, Accessed 12/8/22 at: https://cri.georgetown.edu/wp-content/uploads/2021/02/2021-SRSPN-AARP-Feb-17-Breakout-1-Session-Presentation-2-15-2021-FINAL-.pdf See also: C. Harvey, Access to Workplace Retirement Plans by Race and Ethnicity, AARP Public Policy Institute, February 2017. “… In addition to Social Security, individual savings and employer-sponsored retirement plans are essential sources of retirement income. In fact, workers are 15 times more likely to save for retirement if they have access to a payroll deduction savings plan at work. (Citing Employee Benefit Research Institute. 2006. Unpublished estimates of the 2004 Survey of Income and Program Participation Wave 7 Topical Module (2006 data). Data are for workers earning between $30,000 and $50,000. Accessed 12/9/22 at: https://www.aarp.org/content/dam/aarp/ppi/2017-01/Retirement%20Access%20Race%20Ethnicity.pdf See also: AARP, Voters Overwhelmingly Support Workplace Retirement Savings Plans: AARP backs programs and legislation that make saving for retirement easier for all, 10/20/21. “… AARP research shows that Americans are 15 times more likely to save for retirement when they can do so at work and are 20 times more likely if their workplace savings is automatic. …” Accessed 12/9/22 at: https://www.aarp.org/retirement/planning-for-retirement/info-2021/poll-results-workplace-savings-plans.html
[ii] American Retirement Association, Retirement Legislation Will Expand Savings Opportunities for Over 100 million Americans, 11/29/22. “… Data shows that Americans are 12-15 times more likely to save for retirement if they have access to a retirement savings plan at work….” Accessed 12/9/22 at: https://www.usaretirement.org/retirement-legislation-will-expand-savings-opportunities-over-100-million-americans See also: P. Secunda, The Emerging Law of Portable Retirement Benefits, Chicago-Kent Law Review, Vol. 95, No. 1, 2020, 9/4/21. “… Because American employers are increasingly seeking to define many workers as “independent contractors” or non-employees, these workers have little to no access to retirement plans. In turn, this is critical because, according to AARP, Americans workers are fifteen times more likely to save for retirement when they are covered by a workplace retirement plan.” Accessed 12/9/22 at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3902258 E. Droblyen, Common Sense Just Ahead, Employee Fiduciary, 10/3/18. “… According to AARP, Americans are 15 times more likely to save for retirement when they can do so by payroll deduction through a 401(k) or other workplace retirement plan. …” Accessed 12/9/22 at: https://medium.com/@ericdroblyen/according-to-aarp-americans-are-15-times-more-likely-to-save-for-retirement-when-they-can-do-so-a61ccfde759a See also: CNBC, The U.S. retirement system gets a C+ grade, experts say – even though it’s worth $39 trillion. Here’s why. 9/19/22. “… Americans are 15 times more likely to stash away retirement funds when they can do so at work via payroll deduction, according to AARP. …” Accessed 12/9/22 at: https://www.cnbc.com/2022/09/19/heres-why-the-39-trillion-us-retirement-system-gets-a-c-plus-grade.html
[iii] AARP, Note I, supra.
[iv] GAO, Individual Retirement Accounts: Government Actions Could Encourage More Employers to Offer IRAs to Employees, GAO-08-590, 6/4/08. Author’s Note: Payroll-deducted IRAs have been available since ERISA. A few insurance companies rolled out payroll-deducted IRA products in 1982 – including the Southwestern Life Insurance Company and Philadelphia Life Insurance Company subsidiaries of my employer at that time – Tenneco. We solicited all 100,000+ Tenneco employees however, only a handful opened an IRA account using either of the two insurance company offerings. Because all was paper in 1982, we likely spent more on marketing and communications materials than either insurance company received in contributions.“ Accessed 12/9/22 at: https://www.gao.gov/assets/gao-08-590.pdf See also: J. Towarnicky, Betamax, Edsel, New Coke and…now MyRA Joins An Elite Class of Marketing Failures, 7/30/17. Author’s Note: I was reminded of my own experience with payroll-deducted IRAs when the federal government created and rolled out MyRA. Accessed 12/9/22 at: https://www.psca.org/news/blog/betamax-edsel-new-coke-andnow-myra-joins-elite-class-marketing-failures
[v] Paltering is the active use of selective truthful statements to mislead, here to create the illusion of causality. Data and personal experience confirm that the simple presence of a voluntary enrollment savings plan at work won’t trigger 15X more participation in retirement savings than would occur without a plan at work.
[vi] American Payroll Association (APA), Number of Americans Living Paycheck to Paycheck Has Increased, Getting Paid in America Survey 2022, 9/14/22. Accessed 12/9/22 at: https://www.prnewswire.com/news-releases/number-of-americans-living-paycheck-to-paycheck-has-increased-301624801.html
[vii] Vanguard, How America Saves, 2022. See Figure 30. Overall, regardless of wages, participation in plans with voluntary enrollment is 66%, even though 95+% of plans have employer matching contributions (99% of participants are in a plan with an employer contribution) and tax-favored liquidity. Accessed 12/9/22 at: https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/22_TL_HAS_FullReport_2022.pdf
[viii] Author’s Note: Using the 2019 SHRM benefits study, which looks at 250 different benefit plans/programs, 11% of surveyed employers offered payroll deduction for 529 plans, 8% offered student loan repayment assistance, 11% allow you to bring a pet to work, and 7% offer dry cleaning services. How about payroll deducted IRAs? The percentage that offer that voluntary benefit is so low that it has never been a survey question for as long as I have been reading the SHRM study.
[ix] Investment Company Institute (ICI), The Role of IRAs in US Households’ Saving for Retirement, 2021, January 2022. “… Although most US households were eligible to make IRA contributions, few did so. Only 13 percent of US households contributed to traditional or Roth IRAs in tax year 2020.” Accessed 12/9/22 at: https://www.ici.org/system/files/2022-01/per28-01.pdf
[x] J. Towarnicky, State-Run IRAs are Similar, and Suboptimal, Payroll Deduction is So Suboptimal, 401kSpecialist.com, 6/29/22. Author’s Note: CalSavers sends mixed messages to participants in the program, confirming that they can access their funds at any time, for any reason; yet, at the same time, misleading workers with statements suggesting a “typical” CalSavers participant will have $7,060 in annual retirement income. The example is misleading in that it assumes full annuitization after 40 years of consistent saving at 5% of pay per year, with no withdrawals, and no dislocation due to turnover. It also assumes a $15/hour wage at age 25, with annual increases in real wages and investment earnings averaging between 6.33% and 7.15% per year.” Accessed 12/9/22 at: https://401kspecialistmag.com/calsavers-is-similar-to-oregonsaves-and-suboptimal-opinion/
[xi] APA, Note vi, supra
[xii] Internal Revenue Service (IRS), Filing Season Statistics by Year, through week ending 10/28/22. Author’s Note: In each of the past 10 years, approximately 85% of all refunds were processed electronically, with an average refund of approximately $2,800. Accessed 12/9/22 at: https://www.irs.gov/newsroom/filing-season-statistics-for-week-ending-october-28-2022
[xiii] APA, Note vi, supra. When asked: “Do you prefer receiving a large tax refund after filing your tax return or would you rather have the extra cash in each paycheck throughout the year?”, over 50% indicated that they preferred receiving the large tax refund or confirmed that they didn’t know they had a choice. 54% indicated, for 2021, that they did not complete a new W-4 or that they didn’t know if they had completed a new W-4.
[xiv] Vanguard, note vii, supra.
[xv] GAO, note iv, supra; See also: J. Towarnicky, note iv, supra.
[xvi] J. Towarnicky, Retirement Plan Access is An Issue, Coverage is Not: Disparities in retirement savings and household wealth affect individuals of all races and ethnicities. 12/6/21, Accessed 12/9/22 at: https://401kspecialistmag.com/retirement-plan-access-is-an-issue-coverage-is-not/ See also: J. Towarnicky, Retirement Savings Crisis: Access Isn’t the Issue, Prioritization is. 2/26/21, Accessed 12/9/22 at: https://401kspecialistmag.com/retirement-savings-crisis-access-isnt-the-issue-prioritization-is/
Jack Towarnicky provides independent benefits consulting and serves as a member of aequum, LLC and of counsel for Koehler Fitzgerald, LLC.