READER POLL: Building a Better 401(k)

Last week the Wall Street Journal had a full-page piece (for those who still read the paper version) on “Five Ways to Improve 401(k)s.” This week we asked NAPA Net readers to weigh in.

The five ways weren’t exactly new (indeed, one reader even commented: “All of these options have always been available. Why is this news? Why do you even ask?”) – and it seems fair to say they aren’t even particularly controversial.

Those five ways were:

  1. Raise the default savings rate (above 3%)
  2. Expand access to plans
  3. Reduce 401(k) leakage
  4. Save for things aside from retirement
  5. Make retirement savings last

First we asked readers what they thought of these ideas, and the clear favorite was to raise the deferral rate: 59% thought it was a “great” idea, and another 22% said it was a “good” idea.

Expanding access to retirement plans was second in the “great” category (38%), while 44% thought it was “good.” Not too far behind was reducing 401(k) leakage which, though it drew just 27% in the “great” category, pulled a solid 51% in the “good” idea category.

Save for things aside from retirement was rated “great” by almost as many (26%), but only 33% saw it as a “good” idea. As for the least regarded, that was to “make retirement savings last (include annuities as retirement plan option),” which was rated as “great” by a mere one in five while 24% saw it as “good.” Perhaps more telling, 30% rated it as “meh.”

Biggest Impact?

Perhaps not surprisingly, asked which proposal would have the most impact on retirement savings, “raising the default savings rate,” cited by 54%, dominated the field. As for how the other ideas fared:

8.7% – Expand access to plans
17.4% – Reduce 401(k) leakage
13.0% – Save for things aside from retirement (separate emergency savings acct)
6.6% – Make retirement savings last (include annuities as retirement plan option)

Raising the default savings rate also topped the list of proposals that readers saw as most likely to be adopted/enacted in the next 12 months. Just under 50% were of that opinion, while 38% saw a rosy future for the proposal to expand access to plans. As for the rest, their futures seemed pretty dim to NAPA Net readers, splitting the remaining 12% between them.

‘Better’ Ideas?

This week’s NAPA Net Reader Poll also asked readers if they had an idea/proposal that they liked better – and we got some interesting ideas. Here’s a sampling:

Easier adoption of MEPS, auto IRA or state plans for the roughly 50% of working population that has no access to automated plan.

Include auto-escalation in tandem with automatic enrollment at 6%.

Increase coverage by making it easier for companies to start plans!

Auto deferral increase to 12-15% would have the greatest impact on retirement savings. Second would be requiring all employers over a certain size (say 20 employees) to offer a plan (plan should be mandated to include auto enrollment & increase).

Similar to more access to plans but consider easier admin rules and open multiple employer plans (MEPs). We need to make it easier on small employers to adopt plans and easier admin.

Simplify notifications because they cause confusion and discourage participation. Other than account balance statements, have only one participant notice per year that covers all reporting and disclosure rules. And make it easy to understand.

Make rollovers for workers much easier from job to job.

Remove disincentives to new plan adoption by removing and/or simplifying the expensive testing and reporting requirements imposed on plan sponsors. Modify the requirement for plan audits to eliminate the requirement on smaller asset sized plans. Get rid of top heavy rules and liberalize discrimination rules. The concept that everyone must be inhibited in preparing for retirement just because the lower paid will not or cannot save needs rethinking. So far the result is an entire generation of people ill prepared for retirement such that they must work into their 70s.

Start retirement education MUCH earlier! No reason why elementary and secondary schools couldn’t hit some of the basics before graduation.

Increase tax incentives.

The most effective way to improve retirement savings is to make it compulsory for all wage earners and those with earned income. However, a better way would be to require qualified plans to automatically enroll employees with auto-escalation upon hire. This encourages individuals to save and requires action on their part to opt out of savings.

Raise the annual deferral limit.

Required employer contributions, required employee contributions and no distributions prior to age 65/retirement allowed.

Annuities would be a reasonable approach to making retirement savings but they remain the high-cost option. Consider allowing employees to buy a stream of payments from Social Security or from well-funded defined benefit plans. These benefits would have to be guaranteed to have precedence over any other benefits in priority of payment.

Safe harbor for platforms to spell out the monthly paycheck at NRD Shock & aware time for the American worker.

Eliminate top heavy penalty for small employers.

While a change to the QACA (Qualified Automatic Contribution Arrangement) default would be nice, a higher default percentage has been permitted as an EACA (Eligible Automatic Contribution Arrangement) since the post-PPA 2006 regulations were finalized in 2008. Add to the higher default a perennial application to anyone who opts out or elects a lower percentage. RESA-MEP/PEP will have value to small employers who have adopted a plan. However, RESA will only benefit small employers, and the benefits of RESA for PEPs are modest – allowing multiple employer plan status (single 5500 filing) where the plan has less than 1,000 participants and audit relief where no one employer in the plan has 100 or more employees. Those changes won’t likely convince other small employers who have not adopted a plan.

Adopt loan provisions to facilitate “rollover” of an outstanding loan by new hires. Deemed IRA functionality will also facilitate aggregation/consolidation – once the account balance is larger, fewer workers take preretirement distributions.

Best option to make retirement savings last, for workers who only have modest savings, is to use retirement savings as a tool to defer commencement of Social Security benefits.

Reducing the reporting, testing and notice burden for plan sponsors would solve a host of problems; just freeing up time and money would encourage more plans, better matches and overall satisfaction with existing plans.

I think the savings rate should be at least 10% to start, but encourage employees to make 15% to 20% as a savings goal overall. It should be automatic like tipping at restaurants for good to excellent service. We need to get people to start thinking of their retirement savings as a way to “tip” themselves for their hard work and efforts. If we can change the mindset of the American worker to “tip” themselves to a better future in retirement, that will surely make a huge difference when they stop earning their salaries and live entirely on their retirement plan savings.

Simply ERISA complexity for small plans making it easier to adopt.

I really think the answer is automatic enrollment with automatic increase. And, of course, to implement that there has to be a 401(k) plan in place to begin with, so expanding access is always a good idea.

Other Comments

We also asked readers if they had other thoughts to share on the topic – and sure enough, they did:

Companies also need more incentive to match and setup a 401(k) plan. Remove top heavy & ADP testing. More employers will adopt 401(k) plans. Because they will have no restrictions to setup the plan and contribute.

Regarding leakage, the most common reason people take hardships that I have seen is due to medical expenses. How about they make some improvements to the healthcare system?

Amend the law to allow employers to include independent contractors/gig workers without converting them into employees. From a nondiscrimination perspective, those workers would only be included in 410(b) testing to the extent they are included in the plan. Therefore, if an employer chose to exclude them, they wouldn’t count for 410(b). But if an employer chose to include them, then all such workers would be included in 410(b) to avoid cherry-picking. However, such workers would have some modified participation in the ADP/ACP tests (such as being deemed to contribute at the average HCE/NHCE rate, as applicable) to avoid inadvertent nondiscrimination issues that could pop up based on fluctuating work and compensation. This would give companies like Uber and others an incentive to open up their plans to all of these workers.

Make auto increase and auto escalate easier for employers to implement without mistakes (missing enrollment eligibility dates, etc.) Ease SIMPLE IRA rules (2 year wait rule, ability to change plan mid-year, etc.).

Take 401(k) plans and other benefits out of their silos and better integrate employee benefits across all lines of coverage and plans.

Start teaching people about financial responsibility/ financial education in middle school/high school. Many people have no idea they should have an emergency savings account as well as many other basic financial concepts.

Expanding access is a noble goal, but keep in mind that retirement plans are not required to be provided by employers, and employer match or non-elective contributions are not required if the employer sponsors a plan. Anything that increases employer obligations will get a strong push-back. Consider eliminating the required minimum distributions or allowing them to continue to be tax deferred if they are transferred into the control of another person. Or, tax them now and have the net proceeds transfer to a Roth account of another person.

401(k) was intended to be a supplement to employer contributions. Let’s somehow make that supplemental again.

The only way we are going to get to universal coverage is to require employers to sponsor a plan and require employees to contribute. I doubt that would be popular, but I would prefer it to a government takeover of the system. Including annuities as an investment option only helps the retirement prospects for the insurance agents selling annuities. In my 25 years of working with DC plans that have J&S provisions, our office has NEVER had a participant elect to receive their distribution as an annuity. We’ve seen participants pay handsomely each year for the privilege of having the option to annuitize at retirement, but no one has ever annuitized. That includes the Money Purchase and Target Benefit plans that were common before EGTRRA.

Consolidation of 401(k) plans and rollovers from and into new employer plans – there needs to be a simpler and more convenient method that is systematic for employees to accomplish this. The IRS should mandate all employer plans to accept rollovers from other employer plans and qualified IRAs to encourage more people to keep their retirement plans from being forgotten and not well managed over time. Too many people leave their old 401(k) money in plans they have left long ago and do not take the time to educate themselves on their options and ways to make their savings work more efficiently for them. These are the same people who do not have a financial advisor to help guide them and leave their money out there with exposure to more risk and higher fees because they do not know any better.

If healthcare didn’t cost so darn much, people wouldn’t need such a large nest egg to retire on.

Thanks to everyone who participated in this week’s NAPA Net Reader Poll!

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