Can America avoid a retirement crisis? It’s an increasingly urgent question, as aging baby boomers leave the workforce with modest 401(k) balances, Gen Xers shift into pre-retirement mode, and millennials struggle even to start saving. Meanwhile, some half of workers lack access to a 401(k) or another employer-based retirement plan. And EBRI data show that, for the most part, retirement savings happens only through the workplace.
An obvious solution would be to expand the 401(k) savings system to provide access to workers who are currently shut out. That notion has collected prominent supporters, including academics, politicians and current and former Wall Street executives. But reform attempts have generally failed to gain traction—until now.
Two new proposals, in fact, plus a groundswell of support for the idea both on and off Wall Street, suggest that we may see real movement toward expanded or even mandatory workplace retirement plans after this year's presidential election.
One proposal comes from State Street Global Advisors, which recently issued an open letter to Congress that most employers be required to auto-enroll workers into a 401(k). To cushion this mandate, small business owners would receive tax incentives and options to join multi-employer plans that would simplify record-keeping, as State Street's policy paper explains.
Meanwhile the Bipartisan Policy Center, led by former Democratic and Republican Senators, as well as economists and academics, has come up with its own series of retirement recommendations, including one that would encourage (but not mandate) small employers to sign up for a third-party plan provider.
Both of these proposals echo previous Congressional bills to set up auto-IRAs, which had bipartisan sponsors but failed to gain passage. But State Street retirement policy strategist Melissa Kahn says there’s strong Congressional support right now for expanding workplace retirement plans. "We're at a tipping point right now, with a lot of people reaching retirement with not enough money, a low rate environment, and states setting up their own retirement plans to fill the gaps," she says.
Kahn is seeking Congressional sponsors to back a bill that would expand coverage along the lines of State Street's proposal. The legislation would also reduce the problem of 401(k) "leakage"—people tapping their accounts before retirement—and encourage investment options that would provide lifetime income.
In its comprehensive approach, this bill would be similar to the ground-breaking Pension Protection Act of 2006, which ushered in auto-enrollment and the use of target-date retirement funds as a default investment in 401(k)s. Still, it took a decade for PPA to be enacted by Congress, which suggests that another major retirement bill may face a long uphill battle, especially in today's polarized political climate.
But Kahn is optimistic that a bill could be passed before the next mid-term election. "There will be a new administration in office, and when the president comes in, there's a honeymoon period and a big focus on putting the agenda into action," she says. "If you look at Obama, most of his big accomplishments took place in the first two or three years of his administration."
Tax reform and possibly entitlement reform will be on top of the next president's domestic agenda, she says, which would create an opportunity to introduce a standalone retirement bill, or to attach the reforms to another bill, possibly one addressing tax reform.
If that doesn't happen, and savings continue to lag, there may be increasing pressure to take an even more extreme approach—perhaps even creating a new national retirement plan, such as the one recently proposed by New School economist Teresa Ghilarducci and Blackstone president Tony James. Mandatory plans have worked well overseas, though they seem an unlikely fit for the U.S., given America's strong libertarian streak. Still, once upon a time automatically enrolling workers in a 401(k) plan seemed far-fetched, too.