In an interview by Richard Stolz with EBN (Employee Benefit News on March 16,2016) with Alicia H. Munnell, a retirement industry focused leader in government and academia, she was asked about trends in personal savings rates, defined contribution plans, plan design features such as auto enrollment, and Congressional mandates. Here are excerpts from the interview:
EBN: Has the overall personal savings rate – not just retirement – declined over time? And if so, is there a cultural shift away from thrift involved?
Munnell: If you look at the household in the middle of the income distribution, their average total non-retirement savings is around $15,000. So people save through either defined benefit pension plans, defined contribution plans, or through paying off their mortgage. Since the 1980s, the amount of money going into savings plans has changed little as a percent of wages. That surprises me, considering the shift to defined contribution plans, which require people to do more.
I don’t think there has been any shift in the culture against saving, but middle class incomes really have not grown for 40 years. So every decade that they don’t grow, the harder it gets for people to save. There is a real headwind there pushing people back, but not because they are less virtuous.
EBN: Are you optimistic that defined contribution features like auto-enrollment will turn things around in terms of boosting retirement income security?
Munnell: From the data I look at, less than half of people covered by these 401(k) plans are being auto-enrolled; this idea has not caught on to the extent that you would have thought. But it’s the only way to keep participation up. Also, auto-enrollment without auto-escalation starting from a reasonable deferral rate like 6% could be pernicious if you enroll people at low rates like 3%, and participants just stay there.
EBN: Should auto-enrollment with auto-escalation be federally mandated?
Munnell: Honestly, I don’t understand why Congress can’t pass a law requiring it. It seems we’ve gone about as far as we can go by cajoling participants. It’s true that some companies worry about the added cost to the company if they have to make more matching contributions if everybody’s suddenly in the plan. But it also means that your workers can actually retire when they get to retirement age, and that’s what you would like to have happen for, certainly for workers whose productivity declines.
EBN: What about Congressional action on less controversial retirement issues?
Munnell: I already mentioned requiring automatic enrollment and deferral rate escalation. That can be bipartisan. I don’t want to rip apart the 401(k) system and replace it with anything else; it’s here to stay.
Another area is how to handle plan “leakage,” people taking money out of their 401(k)s before retirement. There is much too much of that going on. I think the continued focus on plan fees is good. I just want the current system to work well, and Congress should want it to work well, too. But we also need to do something about the people who don’t have access to a 401(k) plan. Some kind of auto-IRA. That seems like a no-brainer to me.
TAG Translation: a commentary from Patrick Martin, QKA, SVP | TAG Resources, LLC
Munnell is correct about we as an industry going about as far as possible when it comes to “cajoling participants” not only into participating in a retirement plan, but also into setting aside enough to make a difference for their retirement.
At TAG Resources we are actively pursuing the possibility of bringing back some form of the The Open MEP®. For many employers with a large number of employees and lower participation rates that would be required to have a costly annual plan audit, we know from experience that it would be easier and more cost effective for many employers to offer a MEP arrangement as a retirement plan solution for their employees.
As Munnell mentions, some employers are concerned about the cost of the match if employee participation rises. This can definitely be a significant issue. At TAG, we convert as many plans as possible over to the QACA (Qualified Automatic Contribution Arrangement) Safe Harbor Plan option. With QACA the employer may place up to a two year cliff vesting schedule on the employer match money and also requires auto enrollment and auto increase. This Safe Harbor plan design allows highly compensated employees to contribute more without having to worry about corrective distributions due to testing or the plan becoming top heavy. If participants leave in less than two years any employer match money is forfeited and can be used by the employer to offset future match potentially reducing the amount.
For more information about how TAG Resources can assist you and your employees with retirement planning please contact us.
For more articles on retirement by Alicia H. Munnell and associates, you’ll find them here at the Center for Retirement Research at Boston College.