Constituent policy

Policy proposals could help close retirement savings gaps

Implementing a mix of legislative proposals and industry innovations would go a long way toward reducing pension deficits and improving participants’ retirement security, according to a new briefing from the Institute of Employee Benefits Research (EBRI).

EBRI Research Director Jack VanDerhei using EBRI’s Retirement Security Projection Model (RSPM), examined the effects of five policies in the brief, titled “Impact of Various Legislative Proposals and Industry Innovations on Retirement Income Adequacy”.

The five solutions analyzed by EBRI were 1) the implementation of the Automatic Contribution Plan/Arrangement (ACPA) proposal, which would generally require employers with more than five employees to maintain an automatic contribution plan/arrangement, typically an account Automatic Individual Retirement Plan (IRA); 2) improve the savings credit, which would replace the current savings credit with a 50% government match on contributions of up to $1,000 per year; 3) instituting student loan debt matching, where individuals could receive employer matching to their retirement plans for any payment they make on a student loan; 4) assuming a “skinny” 401(k) plan, a carry-only 401(k) plan allowing annual contributions of up to $6,000, with annual catch-up contributions of $1,000, after age 50; and 5) create fully automatic portability in plans allowing member accounts from a former employer to be automatically combined with a plan from a new employer.

VanDerhei’s analysis found that for households expected to have a retirement deficit, the combination of two proposals – the APAC provisions and the Enhanced Savings Credit – would reduce retirement savings deficits by 17%. 26%, depending on breed.

According to the Society of Actuaries (SOA) Research Institute, the COVID-19 pandemic has had an uneven effect on plan members preparing for retirement across different racial and ethnic groups. Previous research has found that Hispanic workers, in particular, lag behind other groups when it comes to retirement savings.

The EBRI report found that implementing the proposed measures to reduce retirement savings gaps would impact all demographic groups, but would be particularly effective for certain cohorts.

Families in the youngest cohort studied (35 to 39) with a white, non-Hispanic head would need an average of $31,084 in additional retirement savings at age 65 to avoid running out of money in retirement, while families with a black head would need an average household of $47,781 and families with a Hispanic head would need an average of $42,860, according to the new EBRI briefing note. Families with “other” heads would need an average of $42,704.

“The combination of APAC provisions and an enhanced savings credit program has the greatest positive impact on the retirement savings shortfalls of families headed by white and Hispanic workers aged 35-39” , says the report.

The retirement savings surpluses of families headed by black workers of these ages are most positively impacted by the same changes, according to EBRI research.

For families headed by black workers, the increase in retirement savings surplus is 57.9% under the two proposals; for Hispanic families, the increase in surplus is 49.3%; for white families. the increase in the surplus is 43.9%; and the increase in surplus for families headed by “other” households is 39.9%.

The EBRI study then examined the impacts on retirement savings shortfalls if, in addition to receiving APAC and savings credit, all workers aged 35 to 39 eligible to participate in a 401( k) also received an employer matching contribution to their plans in exchange for repaying a student loan.

The results of implementing a student loan match were that retirement savings deficits were expected to be reduced by 22% for black-headed families aged 35-39, an additional 2.9% improvement. compared to the projection which considered only the ACPA scenario and the saver’s credit. Savings gaps were reduced by 2.8% for families headed by white heads and by 0.7% for families headed by Hispanic heads aged 35 to 39 when matching student loans was added. The additional reduction for families with “other” heads is somewhere between the two, at 1.4%.

The study repeated the analysis taking into account the impacts of the two remaining provisions, the “skinny” 401(k) and self-portability.

Retirement savings deficits under these proposals are expected to be reduced by 3.9% for Hispanic-headed families in the 35-39 age bracket; 3.8% for white-headed families; 3.1% for black-headed families; and 2.6% for families headed by “other”.

Adding automatic portability results in a 14.3% reduction for bald families; for families headed by Hispanics of that age, the additional reduction would be 13.9%; black-headed families would have an additional drop of 13.5%; and families with “other” heads would experience a further decline of 10.8%.

EBRI had previously estimated that the self-portability provisions would significantly increase retirement savings over time.

House Ways and Means Committee Chairman Richard Neal, D-Massachusetts, has proposed implementing student loan debt matching, a “skinny” 401(k), and full automatic portability. In September, the Ways and Means Committee approved similar APAC changes. Meanwhile, the Saver’s Credit Proposal was included in the retirement provisions of early versions of the Build Back Better Act to help close the coverage gap and strengthen the existing retirement savings system, but was later removed from the bill before being considered by the full House of Representatives.