Most American workers dream of a comfortable retirement.
Yet many find their money falls short of meeting that goal when they reach their golden years.
Much of the problem has to do with how the retirement system has evolved. Pension plans that used to guarantee a stream of post-career income from employers have given way to 401(k) plans and other retirement accounts that put the responsibility on workers themselves to save.
On Thursday, private and public industry leaders came together in Washington, D.C., at an event hosted by the Employee Benefits Research Institute to identify ways to better help workers avoid a shortfall.
U.S. Secretary of Labor Marty Walsh recalled how his father, a construction worker, retired with a pension and annuity that has enabled his mother to remain financially stable when he died.
“There are too many Americans who don’t have that future stability,” Walsh said. Having a retirement plan is an “essential component” of a good job, he added.
Yet many Americans don’t have any retirement savings or plan at all, and many of those workers are approaching the end of their working careers, Walsh said.
For people of color, the situation is even more dire, he noted. Just 36% of Black households ages 55 to 64 have any retirement savings, and that number goes down to 30% for Hispanic households. Those that do have savings often have very little set aside, according to Walsh.
“This is a crisis that we have to address in the United States of America,” Walsh said.
Increasing access to savings
Many people do not save for retirement because they do not have the opportunity.
As many as 57 million Americans lack access to a workplace retirement savings plan, said Ed Murphy, president and CEO of Empower, a provider of retirement services.
“We know that if people aren’t covered by workplace savings, they don’t save,” Murphy said. “If they don’t access through payroll deduction, they just flat out don’t save.”
Employers that do not offer retirement plans include small businesses like daycare centers, hair salons, auto shops and restaurants that are “just trying to make it work,” Walsh noted.
The lack of retirement plan coverage presents an opportunity for the financial industry and government to work together to find solutions, Walsh said.
“For too long the message to workers has been you’re not saving enough,” Walsh said. “And that may be true, but that’s certainly not the whole story.”
California is one of a handful of states that has implemented automatic individual retirement accounts to help bridge that gap for workers who lack access to retirement plans through their employers.
The program, called CalSavers, opened in 2019 to employers with five or more employees. Those that opt out are required to begin offering their own retirement plan, per California rules.
CalSavers is seeing positive results, according to Katie Selenski, executive director of the program.
About 65% of employees who are automatically enrolled in the program stay in.
“We’re incredibly proud of that, especially when you consider that they’re really not getting any financial incentive” such as a match through either their employer or the state, Selenski said.
About half of the 230,000 employers in California that have been subject to the mandate thus far have opted into the program, while the other half have registered for an exemption because they have chosen to offer a private plan.
With other states offering similar programs, including Oregon and Illinois, there are 600,000 participants in the state retirement accounts, she said. The mandates are also prompting employers to consider offering their own retirement plans.
“We know we are having an effect on new plan formation, and that’s exciting because by any objective measure, 401(k)s are better than Roth IRAs,” Selenski said.
That is due to the fact that 401(k) plans have higher annual contribution limits, plus they don’t restrict participation based on income, making it possible for savers to put aside more money. However, savers may want to carefully consider the advantages of pre-tax versus post-tax savings when making their contributions.
How Congress may step in
To truly fix the program of a lack of access to retirement plans, there needs to be a federal mandate for employer plan formation with incentives, Murphy said.
“Unfortunately, I don’t think Congress will go that far, because there isn’t a level of support, particularly from the Republican side,” Murphy said. “But I think that’s what’s needed.”
Sens. Rob Portman, R-Ohio, and Ben Cardin, D-Md., said they intend to push for changes to the retirement system in the lame duck session of Congress.
Among the changes the lawmakers have proposed are an expansion of the saver’s credit to help lower income workers increase their retirement savings; expanding support for small businesses to provide retirements plans through tax credits; adding catch up contributions for older workers who may have fallen behind on their retirement savings; and increasing the age for required minimum distributions.
The lawmakers hope to move the changes with Secure 2.0, a package aimed at advancing retirement legislation passed in 2019. For Portman, who is retiring from the Senate, the legislation may be a last legacy-making move.
“It’s the last couple of weeks of the session, and the question is whether we will be able to get this into a package that’s otherwise moving, or if not whether it’s popular enough we can take it on its own,” Portman said of the lame duck session.
Much depends on whether the changes will be a priority before the end of the year, Cardin acknowledged.
“I don’t believe there’s much controversy in the substance of what we’ve done,” Cardin said. “The question is whether it will be a priority that we can get it accomplished in the days that remain.”
