The earlier a person can begin setting money aside for retirement the better. Many Americans, though, will require a bit of external assistance in order to kick start their retirement saving in a timely fashion. Fortunately, automatic enrollment is something that can help and there is a plethora of academic research on the various benefits of auto-enrollment. Some of the most popular studies have been in the field of behavioral economics, with the main takeaway being that people are very unlikely to opt-out of a retirement plan after being "nudged" into participating. For example, research from Benartzi & Lewin and Madrian & Shea found conclusive evidence that automatic enrollment is very effective in helping employees overcome the procrastination that can often impede participation, with opt-out rates averaging around just 10 percent. With such positive outcomes, it is not too surprising that government officials have started to take notice. In fact, several states have already enacted auto-IRA programs that would require employers without workplace retirement plans to enroll their workers in IRAs that would have contributions automatically deducted from payrolls. Many other states are considering similar legislation since nothing so far has been enacted on a national level.
One possible way to enhance these mandated savings initiatives is to modify the Saver’s Credit, a special tax break available to many low- and moderate-income taxpayers. Specifically, a recent study from the Center for Retirement Research at Boston College argued that “proposals to redesign the Saver’s Credit by making it refundable, smoothing the phase-out structure, and expanding eligible income brackets could considerably enhance state retirement initiatives by encouraging participation via a lower opt-out rate and increasing the money going into the plans.” Overall, getting more people to participate in some sort of retirement plan can definitely help address America’s savings shortfall but more work will likely still need to be done. An Employee Benefit Research Institute (EBRI) analysis, for instance, found that mandating workers to participate in such plans would by itself not be enough to solve the retirement crisis in the United States if default contribution rates are set at a politically feasible 3 percent. An automated escalation of contributions can help and this kind of plan feature is being incorporated into many of the private sector 401(k) plans that a large number of working Americans already have access to through their employers.
Sources: Boston College (CRR), WSJ, EBRIPost author: Charles Couch