Retirement Savings Crisis: Access Isn’t the Issue, Prioritization is

March 1, 2021

State IRA retirement savings initiatives are designed for workers who don’t currently have access to an employer-sponsored retirement plan. However, Congress resolved the access issue in 1974 by authorizing tax-deductible contributions to Individual Retirement Accounts (IRA).[i]

And, for the past 40 years[ii], all workers could save in an IRA. Coupled with Social Security, IRA savings can provide adequate income replacement for all but the highest-paid workers.[iii]

Everyone has access—workers whose employer doesn’t offer a retirement plan, those who are not eligible for their employer’s plan, those who don’t vest in their employer’s pension, those participating in underfunded/terminated pension plans (single employer, multiemployer, public employer), temps, “gig economy” workers and independent contractors …everyone who earns wages is eligible.

In 2021, every worker can save 100% of her wages up to $6,000 ($7,000 for those age 50-plus). For comparison, one survey suggests the median employee deferral to 401k plans in 2019 was approximately $3,720.[iv]

So, what’s holding workers back?

Nothing, except debt, other financial priorities, lack of disposable income, etc. Obviously, IRA access ≠ IRA savings.

Jack Towarnicky

So, why not mandate retirement savings? Well, retirement preparation isn’t everyone’s top priority.  Mandates might be a good idea for workers who are not aware of the need to save for retirement. That mostly excludes anyone who watches TV or at least those who tune in to America’s most-watched event, the Super Bowl.[v]

But, many have other, more immediate (not necessarily more important) financial priorities. One survey consistently shows that a super-majority of American workers live paycheck to paycheck, and that they would have some or significant difficulty meeting their financial obligations if their next paycheck was …DELAYED ONE WEEK![vi]

Not missed, delayed, and just delayed one week. Interestingly, past versions of that same survey showed that the overwhelming majority of those same workers are eligible for and contributing to their employer-sponsored retirement savings plan.

So, saving in an IRA, as structured today, doesn’t meet their needs—even though the IRA is 100% liquid—monies can be withdrawn at any time, for good reason, bad reason or no reason whatsoever.

Suboptimal, substandard products and processes

If you define success as any increase in retirement savings, state IRA mandates like OregonSaves do get a passing grade. As of year-end 2020, OregonSaves reported $85 million in assets, 88,000 funded accounts, for an average of $970. The opt-out rate was 34%.[vii]

However, activity is often misunderstood to be progress—as may be the situation here. Would you be surprised to know that:

  • Most OregonSaves participants may have an account balance that is less than their contributions,[viii]
  • One of every five dollars contributed has already been withdrawn,[ix]
  • Median tenure of American workers ages 25—64 has consistently been less than five years for the past five decades – meaning a “typical” worker may have 12 employers by the time she reaches age 50, and that to be a consistent saver, she must (re)enroll in OregonSaves every time,[x]
  • One survey showed that 58% of participating employers either had a neutral or negative view of OregonSaves[xi], and
  • Anyone with a bank account and/or paycheck direct deposit can access a superior IRA product.[xii]

We can do better. This is suboptimal, substandard, especially because payroll deduction is so 20th Century.

If the federal government is interested in “auto-IRA”, there are better solutions than payroll deduction IRA programs—solutions that prompt an annual savings decision, that doesn’t impose costs on employers, and reduces costs to taxpayers who participate.

Interested?  Contact me at [email protected]


Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor roles, and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.

 Disclaimer No. 2: This information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used, and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.

[i] Employee Retirement Income Security Act of 1974, Pub. L. 93-406, Signed by President Ford on 9/2/74.  The maximum tax-deductible contribution is the lesser of 15% of compensation or $1,500.

[ii]  Economic Recovery Tax Act of 1981, Pub. L. 97-34, Signed by President Reagan on 8/13/81.

[iii] Author’s calculations, 2019. Assumes $50,000 earnings, age 25 as of January 1, 1982, contribute IRA maximum each year, retire at age 66 (Social Security Full Retirement Age), earn 5% rate of return, use 100% of assets to purchase a 20-year certain, single life annuity.  Other accumulation/decumulation, wage, earnings, etc. combinations produce different results.

[iv] Vanguard, How America Saves, 2020, Median salary of eligible employees was $62,000, median deferral rate was 6% (2019 and all prior years), so, “median” annual contribution ~$3,720.  Accessed 2/26/21 at:  https://institutional.vanguard.com/ngiam/assets/pdf/has/how-america-saves-report-2020.pdf

[v] L. Steussy, Tom Brady, Rob Gronkowski joke about retirement in Super Bowl 2021 commercial, NY Post, 2/5/21, Accessed 2/26/21 at:  https://nypost.com/2021/02/05/tom-brady-gronk-joke-about-retirement-in-super-bowl-commercial/  See also:  T-Mobile, The GOAT in 5G, Accessed 2/26/21 at:  https://www.youtube.com/watch?v=5L6juLUkwuw See also:  J. Stoll, Time spent watching television, 2014 – 2022, 1/13/21, Statista.  Average hours per day declined from 4.2 (2014) to 2.38 (2021) more than offset by dramatic growth in streaming, etc. Accessed 2/26/21 at: https://www.statista.com/statistics/186833/average-television-use-per-person-in-the-us-since-2002/    See also:  F. Richter, The Generation Gap in TV Consumption, 11/20/20, Statista.  There is a wide variance in TV viewing by age, ranging from 1.37 hours/day (ages 18 – 34) to 7.14 hours/day (age 65+).   Accessed 2/26/21 at: https://www.statista.com/chart/15224/daily-tv-consumption-by-us-adults/

[vi] American Payroll Association, Getting Paid in America, October 2020, Accessed 2/26/21 at: https://www.nationalpayrollweek.com/wp-content/uploads/2020/09/2020GettingPaidInAmericaSurveyResults.pdf

[vii] Oregon Saves, Accessed 2/26/21 at:  https://www.oregon.gov/treasury/financial-empowerment/Documents/ors-board-meeting-minutes/2020/2020-12-Program-Report-OregonSaves-Monthly.pdf

[viii] OregonSaves data show that after one year, as of June 30, 2018, the average balance was $307, $558 as of June 30, 2019, and $828 as of June 30, 2020.  Experience shows averages are much less than medians.  For comparison, Vanguard, note iv, ibid, shows the average account balance was more than four times as high as the median.  So, assuming the same or an even greater difference among OregonSaves participants, perhaps 80% or more have an account balance of less than $1,000.  OregonSaves administrative fee has generally been 101 basis points since establishment, July 1, 2017.  The first $1,000 is always invested in the capital preservation fund, which has had an average annual rate of return since inception through January 2021 of only 78 basis points.  Accessed 2/26/21 at: https://saver.oregonsaves.com/home/savers/price-performance.html

[ix] Oregon Saves, Note vii, ibid.

[x] Census Bureau, Employee Tenure, 9/22/20, Accessed 2/26/21 at:  https://www.bls.gov/news.release/pdf/tenure.pdf      See also:  Craig Copeland, Employee Tenure Trends, 1983 – 2018, Employee Benefits Research Institute, 2/28/19,  Accessed 2/26/21 at:  https://www.ebri.org/content/trends-in-employee-tenure-1983-2018   See also:  BLS, Number of Jobs, Labor Market Experience and Earnings Growth Among Americans at 50:  Results from a longitudinal survey, 8/22/19, revised 10/7/20, Accessed 2/26/21 at:  https://www.bls.gov/news.release/pdf/nlsoy.pdf

[xi] Pew Charitable Trusts, Survey of Employers Registered With the OregonSaves Retirement Savings Program:  Topline Results, 2020, Accessed 2/26/21 at:  https://www.pewtrusts.org/-/media/assets/2020/06/oregonsaves-retirement-savings-program-topline-results.pdf

[xii] For example, many offer superior IRA products.  For example, at Fidelity, anyone can open an IRA, use electronic bank transfer capability, pay no administrative fees, and, if they use certain index investment options, pay no asset management fees.  Accessed 2/26/21 at: https://www.fidelity.com/retirement-ira/traditional-ira  See also:  https://www.fidelity.com/mutual-funds/investing-ideas/index-funds?&imm_pid=700000001009773&immid=100611&imm_eid=ep35415530174&imm_pid=700000001009773&immid=100820&imm_eid=ep35415530174&gclid=CjwKCAjwsO_4BRBBEiwAyagRTRA5TWC8Klg8Fv1PNNXDTy7XcmSII0jUzByr820b9EeUakzk6-fTJhoCx68QAvD_BwE&gclsrc=aw.ds