Column: U.S. states want
to give a gentle push on retirement saving
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[May 11, 2017]
By Mark Miller
(Reuters) - 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 small businesses.
[to top of second column]
A pair of elderly couples view the ocean and waves along the beach
in La Jolla, California March 8, 2012. REUTERS/Mike Blake
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 (http://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
“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 participate.”
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 low-income workers.
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.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(Editing by Matthew Lewis)
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