June 11, 2017

DEFINE THE CONTRIBUTION, NOT THE BENEFIT:

The Power of Inertia: More Workers Save in Their 401(k) (Stan Choe, 6/11/17, AP)

 Here's a look at some of the trends found from Vanguard's survey, up and down:

Workers are more likely to be saving.

Across Vanguard's plans, 79 percent of all workers eligible to save in a 401(k), 403(b) or similar account are doing so. That's up from 68 percent a decade ago, and a big reason for it is that workers are getting a more forceful push to do so.

Nearly half of employer plans, 45 percent, sign their workers up automatically for the retirement plan. That's triple the rate from 10 years ago. Workers still have the choice to opt out, but requiring that extra step means more end up saving, and it's another example of trying to use inertia to help. Only 10 percent of workers in plans with automatic enrollment aren't participating, versus 37 percent at plans where signing up is voluntary.

Most typically, employers are enrolling workers to contribute 3 percent of their pay. Not only that, many have also set their programs to automatically raise workers' savings rates each year. Most increase contributions by 1 percentage point, most typically up to a cap of 10 percent.

Lower-income workers are seeing the biggest participation increase.

Workers pulling down big paychecks have always been the most likely to save in a 401(k). More than 90 percent of workers making $100,000 or above participated in their plan last year, the same as it's been through the past decade.

The story hasn't been so good for lower-income workers, who likely feel less comfortable diverting some of their paycheck. A decade ago, for example, only 45 percent of workers making less than $30,000 annually participated in their plan. That was less than half the rate of the highest-paid workers.

But the participation rate for lower-income workers has been steadily climbing in recent years, and hit an estimated 65 percent last year. So while they still participate less often, the gap between how much lower-income workers participate and how much other groups do is narrowing.

Younger workers are also more likely to save than before.

Odds are only slightly better than a coin flip that a young employee under the age of 25 is setting aside some pay in a 401(k) or similar plan. Last year, an estimated 54 percent of such eligible workers were doing so. But that's a much higher rate than a decade ago, when only 38 percent of them were.

Just create a 401k-type account for every newborn and put $10k a year in them through age 18, invested in retirement date mutual funds.  Let individuals and employers contribute directly to the accounts.  Make them--and all currently existing retirement accounts--heritable, but only directly into other individual accounts.  Then means-test all governmental retirement benefits. 

Posted by at June 11, 2017 8:28 AM

  

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