Retirement Plans Work. Access Remains a Problem

Retirement Plans WorkBack in November 2014, I listed 5 reasons why the US Retirement System is working. Increasing average account balances and savings rates coming out of the 2008 market crash have in aggregate, improved the retirement readiness of the average American.

 The private retirement system is effective – for those who have access to it. Retirement plan access is the Achilles heel of the current private retirement system.  Only about half of all American workers have access to a payroll deduction retirement savings plan at work.  For part-time workers, fewer than four in ten have the opportunity to save through a workplace plan.

 The tax code does permit any employee not eligible for an employer sponsored retirement plan to contribute on a pre-tax basis to an Individual Retirement Account (IRA).  Unfortunately, the IRA alternative has a few holes:

  1. People don’t use it (estimates are that less than 5% of the eligible populations contribute to an IRA)
  2. Even those that do, have far lower limits on how much they can defer                                                     (For 2015: $18,000 in an employer qualified plan vs. $5,500 in an IRA)

 The rapid expansion of automatic enrollment features in defined contribution plans has demonstrated the power of using behavioral finance tools in retirement plan design.  Contributory IRAs, even with higher limits, is not likely to solve the problem.

 This vacuum will be filled.  In the most recent State of the Union Address, the President promoted the Automatic IRA, where sponsors without qualified plans could begin making payroll deduction IRAs available with automatic enrollment features.  In our home state of Oregon, one of Treasurer Ted Wheeler’s priorities includes creating a state-run IRA savings plan.

 The financial services industry seems terrified of public alternatives to the current private retirement system.  However, the lack of access among small employers and excessive fees for many that do provide plans, are proof positive that something needs to change.  Shovels are great for digging holes.  But, that’s of little help to the landscaper digging postholes with a plastic spoon.

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