President Obama recently proposed that employers establish an automatic retirement savings account (similar to an IRA) for all of their workers, which brings about a few questions. I asked Chris Conklin, Principal & Actuary for the Insurance Insight Group, if he could give some insight on the issue.
Sarah B (SB): How would being automatically enrolled in such a savings plan help clients increase their retirement savings?
Chris Conklin (CC): Figures from a survey by Deloitte Consulting indicate that about 76% of employees participate in their company’s 401(k) plan. (Source:http://www.workforce.com/section/00/article/25/67/08.php) In the past, employers encouraged enrollment in their 401(k) plans but did not make it automatic. Recently, for new employees, most employers have been making enrollment automatic unless employees choose to opt out. This automatic enrollment feature has modestly increased 401(k) participation in the short term, and government policymakers hope that it will more dramatically increase 401(k) participation in the long run. They believe that simplicity and automatic payroll deduction are keys to increasing the retirement savings rate in our country.">here</a
But, of course, not all employers have 401(k) plans, and presumably retirement savings by employees of such employers lags considerably. So, the Obama administration has proposed that such employers must establish automatic retirement savings accounts which would be funded by employee payroll deductions. The goal is for retirement savings by employees of employers who do not sponsor a 401(k) plan to build similarly to retirement savings by employees of employers who do sponsor a 401(k) plan. Companies that already offer retirement plans would of course be exempt, but also companies in business less than two years and companies with less than ten employees would be exempt as well.
SB: How could such a program be advantageous for producers in the retirement and income planning industries?
CC: Up to now, producers have approached employers without retirement plans, trying to get these employers to offer 401(k) plans, SEP-IRA plans, or a variety of other plans to their employees. The producers have been at a disadvantage because no such retirement plans are mandated by government, and also each of these plans costs the employer money both in plan contributions and administrative expenses. Under Obama’s proposal, employers without retirement plans would be forced to take action, and there is the additional incentive that these retirement savings accounts would be funded solely with employee contributions. So, the employer’s expense is limited to administrative expenses. To the extent that producers can offer these employers efficient solutions to this new mandate, they have an opportunity to earn ongoing commissions as these accounts are funded by employee payroll deductions.
SB: An automatic savings plan such as this is said to increase retirement savings by a whopping 80 percent. Can you think of other retirement savings vehicles that could increase contributions?
CC: Increasing retirement savings by 80% is pretty staggering, so no, nothing compares. It appears that the high participation in 401(k) plans is mostly due to the relative painlessness associated with payroll deduction than it is due to the employer match. (Source: http://www.dallasfed.org/research/papers/2006/wp0601.pdf ) So, it only makes sense for government to mandate payroll deduction for retirement savings as much as possible. If it weren’t for payroll deduction, can you imagine how hard it would be for the average American family to pay their Social Security, Medicare, and income taxes? That said, payroll deduction, employer matches, and tax incentives all play a role in increasing retirement savings.
SB: What are some more simple ways for employees to increase contributions to their retirement savings?
CC: If your employer has a 401(k) plan, make sure you are signed up for it, and if so, increase your contributions. If your employer does not, set up an IRA and have the provider automatically draft money out of your checking account. The mentality simply needs to be to pay yourself first, or rather, to pay your retirement savings first. Most folks figure out a way to live off of what’s left of their paycheck.
What do you think about Obama’s proposal? Can anyone think of any reasons this plan should not be implemented?
*To read more from Chris Conklin, visit his columnist profile, here: http://www.producersweb.com/r/IIG/d/columnist/?auI=1205&tk=2,a,1205,searchResults