Skip to main content

You are here

Advertisement

Boosting Low DC Savings Rates

The Government Accountability Office (GAO) has examined the impact of low DC savings rates, but the real problem may lie elsewhere. The analysis, which bears the characteristically descriptive, but somewhat understated title, “Low Defined Contribution Savings May Pose Challenges,” might have been better titled, “Low-Income Households Who Have Less Access to Workplace Savings Plans, and Who Are Less Likely to Take Advantage When They Do have Access, Are in Trouble.” The report addresses two questions:
  • What are the recent trends in DC plan participation and account savings?
  • How much households could potentially save in DC plans over their careers, and how do key individual and employer decisions affect plan saving?
Access, Savings Connected The report explains that low-income households had less DC savings and access to DC plans than other income groups as of 2013, a relationship that held across all the Survey of Consumer Finance (SCF) years examined. Among working households, GAO found that only 25% of low-income households had any DC savings, compared with 81% of what they described as “high-income” (upper quartile income in the SCF, but no actual income levels were cited) households. For households with some DC savings, the median account savings for low-income working households was an estimated $10,400, compared with $201,500 for high-income households. As might be expected, the lower savings amounts weren’t just a function of income; lower DC plan access and participation rates among low-income households contributed to this discrepancy in DC plan savings. For instance, GAO explains that while about 35% of low-income working households had access to a DC plan (compared with 80% of high-income working households), when they did have access to a DC plan, an estimated (and arguably impressive) 64% of low-income working households participated compared with 95% of high-income working households. In fact, prior GAO analysis found that high-income workers were nearly four times as likely to work for an employer that sponsored a plan as were lower-income workers. Income ‘Tacts’ GAO noted that previous research has shown that low-income households are much less likely than high-income households to have access to a DC plan, and that even when provided access to a DC plan, low-income households may participate at lower rates than high-income households for a variety of reasons, notably a lack of disposable income, and lower levels of financial literacy. Additionally, GAO said that the tax advantages of contributing to a DC plan — increased tax savings — are greater for high-income than low-income households. Moreover, the report also notes that the progressive structure of Social Security benefits reduces the incentive for low-income households to participate in a DC plan, in that it replaces a higher percentage of earnings for low-earners than high-earners, “which may make DC plan participation seem less urgent for low-income households.” The report notes that low-income households and African-American and Hispanic households were even less likely to have access to a DC plan at their workplaces or to have DC savings. For example, GAO found that approximately 25% of working, low-income households had any savings in a DC plan, compared with 81% of working, high-income households. Additionally, access and account balances declined for some, but not all, groups during the recent recession and recovery from 2007 to 2013. For example, African-American working households’ median DC plan balance declined by $14,700 (in 2015 dollars), from $31,100 in 2007 to $16,400 in 2013. Meanwhile, white working households’ median DC balance did not change significantly over the same period. By 2013, white households’ median DC balances were more than three times larger than for African-American and Hispanic households. According to GAO’s projections, households in the lowest earning group accumulated DC savings that generated lifetime income in retirement, as measured by an annuity equivalent, of about $560 per month on average (in 2015 dollars). Yet, 35% of this group had no DC savings at retirement. In contrast, households in the highest earning group saved enough to receive about 11 times more per month in retirement and only 8% had no DC savings. Behavior Modifications GAO also simulated several scenarios involving workers’ decisions (e.g., participating in a DC plan or maximizing the employer match) and employer decisions (e.g., offering a DC plan or automatic enrollment) that increased the amount of projected DC savings available for retirement — particularly for low-earning workers. While GAO’s projections of these scenarios show many possible ways to increase DC savings, they do pose potential tradeoffs for both workers and employers. As for solutions to the challenges outlined in the report, GAO noted that “many decisions, some within the control of workers and some within the control of plan sponsors, can have significant effects on projected balances of DC savings.” Specifically, they noted participant behaviors including plan participation, rolling over of savings at the end of a job, and contributing to a plan. As for employer behaviors, those included availability of plans, eligibility and vesting requirements, and automatic enrollment. For both sets of behaviors, GAO noted a corresponding “strong, positive impact on the DC savings of households in the low-earnings group and a reduction in the number of households with no DC plan savings at retirement.” GAO’s scenarios indicate that increasing participation, rollover rates, and offer rates may have a particularly significant impact on overall savings, especially for low-earners. “While these projections represent stylized scenarios, they illustrate the potential improvement on retirement savings from changing these key decisions,” according to the report.

Advertisement