The sooner people start saving for their financial future, the higher the likelihood that they will be able to achieve their desired retirement lifestyle. Unfortunately, procrastination is a far too common occurrence for many individuals when it comes to setting aside money. To motivate more Americans to save earlier rather than later, 401(k)s and similar retirement plans have enjoyed favorable tax treatment for roughly a century. Such incentives can provide participants in these plans with more control over how and when they pay taxes on their savings but a new study from Boston College’s Center for Retirement Research (CRR) found that the related boost to participation is quite modest. Specifically, lower-income workers tend to be passive savers whose behavior is not responsive to financial incentives, and even high-income workers who would get the largest monetary benefit from a more favorable tax treatment of retirement saving were found to be only slightly influenced by marginal improvements in tax incentives.
Alternatively, behavioral “nudges” such as automatic enrollment have been proven to be quite successful at getting more Americans to save for retirement in a timely manner. For example, data from the Vanguard Group showed that the average 401(k) participation rate was 88 percent for plans with auto-enrollment in 2015, compared to just 58 percent for plans without auto-enrollment. As we learned last week, a growing number of state governments recognize the benefits of automatic plan features and have responded by implementing auto-IRA or similar programs that would force employers without workplace retirement plans to enroll their workers in IRAs. However, a majority of small business owners recently surveyed by The Pew Charitable Trusts regarding such state proposals to set up automatic payroll deposit IRAs for private sector workers expressed “concerns about states’ administrative capabilities and questioned the motives for such plans.” Here are a few more highlights from the Pew survey:
- Many employers said they thought workers might opt out of state-based auto-IRAs because of distrust of state-affiliated savings programs, limited incomes, or tight household budgets.
- Younger workers also might not take part because their focus is not on retirement needs, some said.
- Employers who offer retirement benefits said they would not drop plans if a state program were available to employees.
- Participants said creating a state-approved online marketplace for private firms to offer plans to small employers would be redundant because existing internet-based tools are available.
Sources: Boston College (CRR), NAPA, Vanguard Group, The Pew Charitable TrustsPost author: Charles Couch