The current defined contribution (DC) retirement plan system could be improved along three dimensions, according to researchers from the Center for Retirement Research (CRR) at Boston College.
In a report prepared for the Department of Labor (DOL), “An Analysis of Retirement Models to Improve Portability and Coverage,” Alicia H. Munnell, Ph.D., the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management and director of the CRR; Anek Belbase, research fellow; and Geoffrey T. Sanzenbacher, Ph.D., research economist at the CRR, say the first dimension is to minimize procedural barriers to moving money between employer plans in order to reduce the number of small and lost accounts. The second is the effect of transfers from the workplace system to the adviser-oriented retail component—such as individual retirement accounts (IRAs)—and the third is leakage from both workplace plans and IRAs, which, the researchers say, tends to cut balances at retirement by about 25% on average.
To enhance portability, the researchers suggest requiring DC plans to accept rollovers; standardizing rollover rules and paperwork; encouraging direct rollovers; setting up a public registry to prevent lost accounts; and creating a clearinghouse to automatically roll over small balances. To protect transfers from workplace accounts to IRAs, the researchers recommend limiting forced transfers and expanding participants’ investment options; reducing conflicts of interest through a fiduciary rule; and enhancing the transparency of fees. Finally, to reduce leakage from DC plan accounts, they suggest limiting or prohibiting cashouts at job termination; tightening hardship withdrawal criteria; and coordinating the age for penalty-free withdrawals with Social Security claiming provisions.
The researchers also note in the report, “The percentage of workers covered [in an employer-sponsored plan] has not improved since the late 1970s.” They attribute this to two factors: Many employers—particularly small employers—fail to offer a retirement plan, and the uncovered employees who work for an employer with a plan either choose not to participate, often through inertia, or are ineligible because they have spent too little time in the job, work too few hours, or are in a job the plan does not cover. “As a result, increasing coverage will require both expanding access to employer-based plans and increasing participation in existing plans,” the researchers say.
They note that federal and state initiatives have been aimed at increasing coverage for traditional workers, such efforts being to simplify adopting plans and to enact laws that require employers to provide access to a plan. Efforts to expand coverage by moving away from the voluntary model and imposing a mandate on employers have been effective in other countries such as the United Kingdom; and even within the voluntary system, DC plans that automatically enroll workers—with the ability to opt out—has improved participation rates, the researchers note, adding that proposals in the U.S. to automatically enroll workers in an IRA have not been adopted at the federal level, but several states are moving forward with these auto-IRAs.
To improve participation for workers eligible for an employer DC plan, the researchers suggest mandating that these plan automatically enroll new employees immediately and nonparticipating employees periodically. To enhance the voluntary DC plan system, they recommend publicizing the availability of federal plans designed for small business—SEP [simplified employee pension] IRAs and SIMPLE [savings incentive match plans for employees] plans; expanding state-run programs like those in New Jersey and Washington if they prove successful; enacting legislation to facilitate the establishment of open multiple employer plans (MEPs); and expanding the saver’s tax credit.
The researchers also advocate for mandating employers to establish plans with auto-enrollment for employees without coverage and mandating employers to contribute to a retirement plan on behalf of their employees, as in Australia.Not to leave out the self-employed and the growing number of contingent—or “gig”—workers, the report also proposes that policymakers require individuals to contribute a percentage of earnings to a retirement savings vehicle and encourage innovative efforts to bring retirement plans to contingent workers.
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