(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Mark Miller
CHICAGO May 11 How to get people to save for
retirement? There are two schools of thought: cajole and
educate, or give people a little push in the right direction.
Pushing has been ascendant over the past decade for a simple
reason: it works. Fueled by “behavioral economics” - which
focuses on the psychological and emotional factors in people's
economic decision-making - this approach holds people will save
if the process is easy and if they are given a gentle nudge.
Workplace retirement plans have successfully boosted
participation and saving rates with features like default
auto-enrollment for new workers and auto-escalation of
contribution rates. They have also added popular target date
funds, which automatically maintain an age-appropriate
investment balance between equities and fixed income.
State governments have drawn on these behavioral economics
lessons as they target a different problem: roughly half the
U.S. workforce lacks access to any kind of workplace retirement
plan. The largest coverage gaps can be found at small employers,
who do not want to deal with the cost or regulatory burden of
administering 401(k) plans.
Seven states have passed legislation authorizing the launch
of government-sponsored, low-cost savings programs for these
workers, and many will include the automated features that have
worked well in private sector plans. Most of the state programs
require employers without their own plans to set up payroll
deductions for automatic contributions to a publicly run IRA
account. And most of the plans will use “gentle push”
structures, auto-enrolling workers, but giving the option to opt
out if they choose.
So this idea makes clear sense. Yet the state auto-IRA plans
hit a roadblock last week when the U.S. Senate voted to
eliminate regulatory support for them.
The regulatory support in question is a ruling issued last
year by the Department of Labor (DoL) that exempts state plans
from the Employee Retirement Income Security Act of 1974 (ERISA)
if they meet certain conditions. That provides important
reassurance to employers participating in the plan, who worry
about compliance cost and legal liability under ERISA.
The Senate - following up on earlier action in the House -
approved legislation pulling back the DoL regulatory guidance,
and President Donald Trump is widely expected to sign off on the
measure. California and other states are vowing to
press on with their auto-IRA programs, which means the issue of
ERISA liability will be decided in the courts - a process that
likely will drag on for years. The uncertainty also could slow
the momentum in other states considering similar programs.
HURDLES: COMPLEXITY AND INERTIA
Congress erected the roadblock to appease powerful elements
of the financial services lobby. I am convinced their motive is
to protect profit: they simply do not want to compete with
low-cost government-sponsored “public option” programs, which
will cut into the high-fee retirement products they sell to
For public consumption, their explanations are different.
Opponents argue that consumers need the protections of ERISA -
an argument that does not make sense since most IRAs are not
covered by ERISA. And they will tell you that what we really
need is better “cajole and educate” efforts to persuade people
to save more. If workers would only take the time to become more
financially literate, we would see higher saving rates.
But financial literacy education programs have failed to
make much of a dent in the problem. “Negligible” is the word
used to describe their impact by one recent academic review (bit.ly/2q0ZpCJ).
Complexity and consumer inertia are more significant hurdles
to saving. Consider IRA accounts, which require proactive steps
to open along with a fair amount of paperwork. IRAs hold nearly
half of all assets in private sector retirement accounts,
according to a study released last month by the Center for
Retirement Research (CRR). But nearly all of the assets
represent rollover dollars from 401(k) plans; individual
contributions in 2014 accounted for just 13 percent of new
“Behavioral economics teaches us that inertia works against
complicated products like this, so a very small number of people
open them,” said Jeremy Smith, director of the Retirement
Savings Initiative at the Aspen Institute’s Financial Security
Program. “You’ll sometimes hear arguments that people don’t save
because they just aren’t interested, but that is belied by the
track record with auto-enrollment workplace plans,” he adds. “It
turns out that if you make it easy, lots and lots of people will
Indeed, Vanguard reports that employees in plans with
auto-enroll features have a participation rate of 88 percent,
compared with only 58 percent in plans with voluntary
enrollment. For lower income workers (less than $30,000),
participation rates are more than double.
Mandatory, universal saving programs in other countries also
are showing impressive results. Australia has had a mandatory
program since 1992; Britain and New Zealand both have had
programs for less than a decade. All three programs have boosted
the percentage of pre-retirement income available to workers
once they retire, according to the Organization for Economic
Cooperation and Development; the gains are especially strong for
The state auto-IRA plans have the potential to help 55
million people gain retirement plan coverage at work, AARP
estimates. No amount of cajoling will get us even close.
(Editing by Matthew Lewis)