New CAP Report Explores Benefits of Automatic Retirement Accounts

Yesterday, the Center for American Progress unveiled a new analysis of its Secure, Accessible, Flexible and Efficient (“SAFE”) Retirement Plan, finding that it could both reduce costs for employers and provide more security for workers. Similar to Sen. Tom Harkin’s USA Retirement Funds proposal and a range of state initiatives, the SAFE plan stems from a growing recognition that we need to turn back the tide on a retirement savings system that has increasingly pushed all the risk onto individual workers – setting them up for what many are calling a retirement security crisis.

Many of the features of the SAFE plan are similar to those of the California Secure Choice Retirement Savings Program (“CSC”) that we wrote about earlier this year. For example, both plans offer:

• Automatic enrollment and deductions – Workers will be automatically signed up for a retirement account, with modest contributions withdrawn from their paycheck. Though they’ll have the option to opt-out at any time, recent GAO data and behavioral economics research have confirmed the effectiveness of auto-enrollment in boosting workers’ plan participation.
• Pooled risk and professional management – To cut both cost and risk, each plan would pool workers’ investments, which could then be professionally managed with much lower fees than a traditional 401(k). This feature would also shift the burden and complexity of choosing an ideal investment strategy from individual workers to finance experts; as CAP notes, this alone could lead to an average increase in returns of 1%.
• Portability – Both CSC and SAFE accounts would move with workers from job to job rather than being employer-based, thereby greatly cutting down on the “leakage” that occurs when 4 out of 10 workers cash out some portion of their 401(k) during a career move.

One notable difference is that the SAFE plan explicitly provides for automatic escalation of workers’ contributions, which was a recommendation we offered for California’s initiative in our policy brief. Automatic escalation has been found to be an effective way to help workers effortlessly increase their savings in pace with their earnings. Another key distinction is that the SAFE plan does not provide a guaranteed return, which is a unique feature of CSC. Nevertheless, the SAFE plan provides for a “collar” that would help smooth out years of particularly high or low returns. This feature would provide a similar benefit as the proposed “gain/loss account” in CSC, which would help protect workers from market fluctuations.

However, just as the SAFE plan features many of the same strengths as California’s, it may also benefit from some of the same additional considerations. For example, like Sen. Harkin’s plan, the SAFE plan automatically pays out benefits through an annuity fund to help ensure that retirees don’t exhaust their savings prematurely. This is an important objective. Nevertheless, at a time when a substantial proportion of Americans are dipping into their retirement accounts for everyday or immediate expenses, it’s important to consider families’ broad range of saving needs when assessing a plan’s design features. As we noted in our paper,

[O]ne obvious solution to account “breaches” is to make accounts inaccessible to beneficiaries until retirement and to require annuitization, as with traditional pensions. Yet without access to liquid savings that can address more immediate needs and changes of circumstance, many workers may feel understandably reluctant to lock away their savings for the future at the cost of increasing their financial vulnerability in the present.

In other words, an unintended consequence of requiring annuitization—rather than, say, establishing it as the default with an opt-out—could be to deter participation in the first place, thus undermining the plan’s objective. To both maintain high rates of participation and forestall “breaches,” initiatives like CSC and the SAFE account would ideally be complemented by proposals and mechanisms to simultaneously support shorter-term savings. One policy recommendation we’ve offered to help low and moderate-income families save for both immediate needs and future security is the Financial Security Credit, which Rep. Jose Serrano just introduced in the House. Together with proposals like SAFE or CSC, the Financial Security Credit (or, similarly, CAP’s Universal Savings Credit) could help ensure that families have a savings cushion set aside for a range of needs and goals across the life course.

You can read CAP’s full report here, and our California issue brief here. To learn more about the Financial Security Credit, check out this overview.