New policies are needed to address retirement savings access and portability issues that Millennials and other generations face as part of the growing gig economy, according to panelists at a Capitol Hill forum.
“The Millennial Perspective: An Intergenerational Discussion on Retirement Savings” sponsored by WISER was centered on the organization’s iOme (I OWE ME) Challenge to develop a comprehensive proposal to address the supposed challenges Millennials face in saving for retirement.
In what was somewhat of an ironic twist, the winner of this year’s challenge was Evan Avila, a 19-year old student at the University of Maryland Baltimore County who is a member of Generation Z.
Avila put forward a three-part plan that calls for a Multiple Employer Plan IRA (MEP IRA), an expansion of the Saver’s Credit and enhanced retirement planning education for college students.
Avila explained that his MEP IRA concept encompasses Roth IRA and myRA-type features, but it also builds on behavioral economics, including automatic contribution and escalation features. In addition, the MEP IRA, as opposed to the myRA, would offer participants a broad range of diversified investment options, he noted.
Attendees also heard from policy experts who discussed current retirement savings trends of Millennials, current roadblocks they may face and potential solutions. One recurring them throughout the forum was whether Millennials are on track to meet their retirement goals and how do they compare to other generations.
Access and Participation
Jennifer Brown with the National Institute of Retirement Security cited a recent survey of theirs finding that two-thirds of working Millennials have nothing saved for retirement, and of those who do, a large portion have under $5,000 saved. She noted that there is sizable discrepancy between average and median balances of Millennials, which largely has to do with zero account balances.
Brown further explained that two-thirds of Millennials work for an employer that offers a retirement plan, but only a third participate. She noted that NIRS’s survey found that 4 out of 10 Millennials cited eligibility requirements as a reason for not participating in a plan, pointing to either not working enough hours or have not worked long enough.
The good news, according to Brown, is that employer-sponsored retirement plans are within reach for Millennials, but the challenge is securing their participation in the plan. Among some of her recommendations were to expand eligibility for part-time workers and reduce waiting periods. In addition, she urged that more companies use auto-enrollment and increase employer matches and default contribution rates.
Drawing upon those comments in addressing potential roadblocks was Nevin Adams with the American Retirement Association, who explained that the biggest thing that can be done is to help people save for retirement is to give them access to a retirement plan at work. “If you look at where the gaps are, it’s where individuals don’t have that access. It’s not that they couldn’t walk down to their local bank and open an IRA, but they don’t do that,” Adams noted. He further observed that if the employer offers a plan, the employer offers peer pressure, education, an employer match and that makes a big difference.
At the same time, Adams acknowledged that it doesn’t do much good if a person is not eligible for a plan, which does appear to be an issue with gig economy workers. One aspect that does appear to be changing is that more companies are reducing their waiting periods, he further observed.
For his part, Sudipto Banerjee with T. Rowe Price citing a recent survey of the firm’s noting that Millennials compared to other generations expressed the highest level of comfort that they are on track to meet their financial goals. At the same time, Banerjee noted, Millennials are at a different life stage and have different priorities, such as paying off debt and saving for a home, which helps explain why many in the generation are contributing below the IRS maximum limit.
Adams tended to agree with those comments, acknowledging that younger Millennials do have other priorities and change jobs a lot, as they always have. “I think a lot of times we get a little judgmental about Millennial’s savings habits, but we do have to acknowledge that they do have other current priorities,” Adams noted.
Another aspect of the gig economy, according to the Aspen Institute’s Joanna Smith-Ramani, is that the worker paychecks can vary from day-to-day, which makes some workers hesitant to sock away savings for retirement. To address this dynamic, Smith-Ramani pointed to their proposal to create “sidecar” accounts to link short-term savings products to traditional retirement accounts to better meet consumers’ short- and long-term financial needs.
She explained that the idea is to have workers contribute to a short-term savings account that could be used for emergencies and once a sufficient savings buffer was built, additional contributions would automatically be diverted to a traditional retirement account. “This allows for some liquidity, some building of confidence, some ability to say if I need some money I got it, and at the same time you’re actually stocking up your retirement account,” Smith-Ramani noted.
Addressing the suggestion to expand the Saver’s credit, Adams contended that as long as the government makes people fill out a separate tax form other than the EZ form in order to obtain that credit, that you likely won’t see a big change in the take-up rate. Adams also believes that HSAs will become a more attractive feature to Millennials and others, particularly once the contribution limits are increased.
Leakage and Portability
As for other roadblock for savings, Tom Johnson with Retirement Clearinghouse addressed the issue of 401(k) leakage. He noted that the bad news is that younger people tend to cash out their balances when they change jobs, but the good news is that they tend to keep the money in the system.
Citing GAO data, Johnson explained that cashouts make up 89% of the leakage that occurs within the retirement system, while the other forms consist of hardship withdrawals and loan defaults. One area to concentrate on is building up accounts. Johnson emphasized that leakage is generally reduced once accounts grow to be a sizeable amount in the $10,000 to $15,000 range. He explained once amounts start to reach this level that you generally see a reduction in the amount of cashouts.
To that end, he noted that if you had perfect portability the overall effect of reducing leakage is $1.5 trillion on a present value basis, based on EBRI data. Johnson also referenced a Boston Research Technology survey that found that 63% of cashouts were not attributable to emergencies, and when asked why, most respondents said it was because it was the easiest thing to do.
He noted that his firm has been working on creating a mechanism for auto portability in DC plans to make it easier for employees to move money between employers when they change jobs. Johnson explained that his firm has been working with the Department of Labor in an attempt to obtain a “blessing” on solutions and best practices for auto portability and was hopeful that guidance would be issued in the near future.