New research shows that so-called “automatic” IRAs can help narrow the retirement savings gap, but it’s going to take more than a 3% deferral rate to close it.
Data has shown that workers who have access to a retirement plan at work are 15 times more likely to take advantage of the opportunity to save for retirement, and are not only more confident about those prospects, but are, in fact, better prepared.
However, millions of working Americans do not have access to a plan at work, and to address this “coverage gap,” a majority of states have launched initiatives designed to broaden access, with a common feature being that employers above a certain size are required to offer a retirement plan, at a minimum a payroll deduction IRA, with a specified default contribution from the worker, who is allowed to opt-out of the program if she/he so desires.
A new analysis by the nonpartisan Employee Benefit Research Institute (EBRI) considers the impact on the nation’s retirement savings gap if such “automatic IRAs” were made universal.
While the impact varies depending on a number of key assumptions (notably the age of the worker, the default contribution rate and the opt-out rate), EBRI noted that among households where the family head is ages 35-64, adding auto-IRAs with no opt-outs would reduce the projected savings deficit 6.5%, from $4.13 trillion to $3.86 trillion, with lesser impact when higher opt-outs are projected.
Individual Impacts
While policymakers may find the aggregate analysis instructive, the more pertinent results for advisors — and participants — may be the impact that those programs have in reducing the retirement savings shortfalls (RSS) at an individual level. The EBRI analysis found that, among those households ages 35-39, the average RSS (which includes long-term care costs) is reduced by 10.6%, assuming no opt-outs. The impact is larger for individuals.
Of course, a static 3% default contribution rate is widely deemed to be insufficient to provide adequate retirement savings on its own. EBRI provides a comparison in result to an auto-IRA program with a 6% employee contribution, and — assuming no opt-outs (and that the employee continues to work for the same size organization throughout his/her career), finds that the reduction in average deficits for the youngest cohort almost doubles — a 17.9% reduction in retirement savings shortfalls.
