One of the big reasons why many folks aren’t saving enough — or even anything — for retirement is not because they’re not willing, but because they don’t have a way to do it.
“We say people should save for retirement, but that ignores the lack of access workers have to retirement savings and education,” U.S. Secretary of Labor Marty Walsh said during a recent retirement summit hosted by the Employee Benefit Research Institute (EBRI) focused on how to make retirement more equitable for all people.
Walsh noted that 65% of small business employees don’t have retirement plans, and only 44% of Black households and only 29% of Hispanic families had access to a retirement account.
“Retirement savings is a fundamental need,” Walsh said.
Here are five ways to increase that access, according to the EBRI retirement summit panelists.
Auto-enrollment
One way to increase equity in retirement is for employers to adopt auto-enrollment in their sponsored savings plans, according to several panelists.
Auto-enrollment is the process of companies automatically enrolling employees in retirement plans. These plans take the guesswork out of investment in saving for retirement for many workers.
“It’s important to let employers have default plans for retirement income. 30% of low-income workers have no savings for retirement, so default plans are important,” Ken Mungan, chairman of the board at Milliman, said.
At the end of 2021, 70% of employers with at least 1,000 workers had auto-enrollment plans with the Vanguard investment advisor group. In that same time period, employees enrolled in auto-enrollment programs saved 10.9% compared with 7.9% of employees in voluntary retirement programs.
“Legislation on a national level that would mandate retirement enrollment is important,” Lori Lucas, the president and CEO of EBRI, said.
Increase the Saver’s Credit
Lucas also advocated for an increase in the Saver’s Credit. That provision, also known as the Retirement Savings Contribution Credit, cuts taxes by up to $1,000 for single people and $2,000 for married low- and moderate-income couples when they contribute to a retirement fund. The credit amount is 10%, 20%, or 50% of your contribution to retirement accounts, depending on your adjusted gross income.
To claim the credit, workers have to fill out a Form 8880 when they file their taxes. Single workers can claim up to 50% of the credit if their income is between $21,750-$32,625. Married couples filing jointly can get 50% of the credit if their income is under $43,500. The credit percentage decreases as the worker’s income increases.
Lucas believes that an expansion of the credit to include more low and moderate-income families can enable more to save for retirement.
“An increase in the Saver’s Credit is an important step forward,” Lucas said.
Make it easier to offer retirement plans
Ed Murphy, CEO of Empower, believes that a combination of private employer benefits and government legislation can make retirement saving more equitable.
“The SECURE Act 2.0 needs to move through Congress. I would like to see a public-private partnership and I support a mandate for companies to offer retirement plans to workers,” Murphy said.
The SECURE Act is a revision of the 2019 bill framework that would give part-time workers more access to retirement plans and help small businesses offer these options to their workers.
“The SECURE Act will help low-income families that need to be banked to save money for the future. There’s a plan for small businesses to give benefits to employees,” Sen. Rob Portman (R-OH) said. Portman and Ben Cardin( D-MD) received the 2022 Lillywhite Award for their bipartisan work to pass the SECURE Act.
Stop leakage in retirement savings
Many panelists talked about stopping leakage, or withdrawing retirement funds early. With inflation rising all year, more people may have been tempted to tap their 401(k)s early to cover soaring costs, but there are penalties. If workers withdraw before they’re aged 59 ½, they have to pay taxes and a 10% penalty.
Leakage in retirement accounts is rising. A recent Vanguard study of 5 million participants in 1,700 retirement plans showed the percentage of hardship withdrawals from Vanguard retirement accounts at 0.5%, an all-time high.
Steve Neeleman, founder of HealthEquity, a health savings account custodian, said that health insurance could be a culprit for people taking money out of their retirement accounts.
Health savings accounts are paired with high-deductible health plans to reduce medical costs, However, Neeleman said that the funds in HSAs may not always be enough to cover a worker’s medical expenses. Single health savings account members can contribute up to $3,850 a year, while married couples can contribute up to $7,750.
Neeleman also said that there is leakage in retirement savings because there is little portability of retirement plans when workers change jobs.
“More people cash out their 401(k)’s because it’s too hard to roll over to different jobs,” Neeleman said.
Dan Laszlo, chief executive officer of Millennium Trust, said technology could help low-income workers who often change jobs to keep their retirement savings.
“Digitizing the portability of retirement plans could help workers move retirement funds to other jobs,” Laszlo said.
Manage spending in retirement
The EBRI Retirement Summit concluded by talking to retirement experts about how people can save money after they retire.
With many people living well into their 80s and Social Security only paying about $1,827 starting in 2023, many older people don’t have enough money in retirement to cover expenses. Anne Ackerley, head of Blackrock’s Retirement Group, said that annuities could level the playing field for retirees.
“Giving an annuity with [a] 3% [rate] to a retiree from 55-80 years old can help older retirees who are living longer,” Ackerly said.
She also advocated for employers to offer workers target-date funds to help them have enough money to meet their retirement goals. Target-date funds have portfolios with automatically chosen stocks and bonds that have a specific date for withdrawal.
“Investment needs to be made simple with target-date funds,” Ackerly said.
