State Auto-IRAs are Building Momentum

State Auto-IRAs are Building Momentum

About half of the nation’s private-sector employees do not have a retirement savings plan at work, and that hasn’t changed in at least 40 years.

Some states are trying to fix this coverage gap in the absence of substantial progress by the federal government in solving the problem.  And the state reforms are gaining momentum.

Auto-IRA mapIn the past year alone, Maine, Virginia, and Colorado have passed bills requiring private employers without a retirement plan to automatically enroll their workers in IRAs, with workers allowed to opt out. New York City, which is more populous than most states, approved its program in May. And other states are either starting to implement programs or looking at their options.

Auto-IRAs are already up and running in California, Illinois, and Oregon, where a total of nearly 360,000 workers have saved more than $270 million so far. The programs are run by a private sector administrator and investment manager.

These mandatory programs are the only practical way to close the coverage gap, because voluntary retirement saving initiatives have never done the trick. Numerous voluntary plans created by the federal government – such as the Simplified Employee Pension (SEP) – have failed to measurably increase coverage.

Large corporations usually offer a 401(k) plan and match some of their workers’ savings. But millions of restaurants, shops, and other small businesses either can’t afford to set up their own 401(k)s or don’t see it as a priority. Without additional saving, half of U.S. workers are at risk of a drop in their standard of living when they retire.

State auto-IRA programs eliminate the administrative burden and expense to employers of a private plan and provide an easy way for workers to save. The money is taken out of their paychecks before they can spend it and is deposited in an account that grows over time. The state programs also permit workers  to withdraw their contributions without a tax penalty for emergencies, like a medical problem or broken-down car, if they need the money they’ve saved. …Learn More

Think of Saver’s Tax Credit as Free Money

Life’s unpleasant surprises – a new set of tires or a big vet bill – can get in the way of saving money for retirement. This is especially true for low-income workers.

But if they are able to save a little here and there, the federal government provides a very big assist through its Saver’s Credit. Unfortunately, low-income workers are also the least likely to be aware the tax credit exists.

Savers credit tableHere’s how the Saver’s Credit works. The IRS returns half of the amount saved over the year – up to certain limits – by a head of household earning less than $29,626 or a couple earning less than $39,501.

So, the head of household with earnings under the income limit who saves $2,000 in a tax-exempt retirement plan like an IRA or an employer 401(k) would get back the IRS’ maximum credit of $1,000. And the couple that saves $4,000 would get back the $2,000 maximum.

Piggy bankGranted, these are very large sums for low-income workers. But if they can manage to save a little bit every week, the Saver’s Credit is effectively free money from the federal government.

Smaller tax credits are available to people with slightly higher incomes. Individuals and couples do not qualify if they earn more than $49,500 and $66,000, respectively.

Unfortunately, only about a third of households earning under $50,000 are aware of the credit, according to a Transamerica Institute survey.

Now that you know, start saving. You’ll get a big chunk of it back. …Learn More


Printed Social Security statement

Workers Overestimate their Social Security

The U.S. Social Security Administration reported a few years ago that half of retirees get at least half of their income from their monthly checks. For lower-income retirees, the benefits constitute almost all of their income.

Yet Americans have only a vague understanding of how this crucial program works – one of many obstacles on the road to retirement. A new study by the University of Southern California’s Center for Economic and Social Research finds that workers are overly optimistic about their future benefits, which is one reason so many people don’t save enough for retirement.

Workers “would probably have fewer regrets after retirement” if they were better informed, the study concluded. And many retirees in the study have regrets. Roughly half wished they’d done a better job of planning.

The researchers’ focus was on working people ages 30 and over. In a survey, the workers were asked to pick the age they plan to start Social Security and to estimate their future monthly benefits. To get as good a number as possible, they were instructed to predict a range of benefits in today’s dollars and then assign subjective probabilities to the amounts within that range.

Their guesses were compared with more precise estimates, made by the researchers, who predicted each workers’ future earnings paths – based on characteristics like their age, gender, education, and past and current earnings – and put them into Social Security’s formula to calculate the expected benefits.

The subjective estimates made by every group analyzed – men, women, young, old, college degree or not – on average exceeded the researchers’ more accurate estimates, though to different degrees. For example, women were more likely than men to overshoot the reliable estimates. Interestingly, people who said they had “no idea” what their benefits would be came closer to the mark than anyone – having less confidence apparently offset the tendency toward overestimation.

Young adults, who aren’t naturally focused on retirement, overshot their benefits the most. This is not surprising but still unfortunate, because good decisions made early in a career – namely, how much to save in a 401(k) – will greatly improve financial security in retirement.

One explanation for workers’ widespread inaccuracy, the researchers found, is that they aren’t clear on how much their benefit would be reduced if they claim it before reaching Social Security’s full retirement age. …Learn More


Photo of the board game Life

Here’s Why People Don’t Save Enough

In the United States and Singapore – places that emphasize self-reliance – many older workers and retirees admit that, if given a do-over, they would have saved more money over the past 20 or 30 years.

Regret was more common in the United States – 54 percent of older Americans had it versus 46 percent in Singapore, according to comparable surveys in each place. Perhaps the reason Singapore has less is because the government requires that employees set aside more than a third of their income in three government-run savings accounts for retirement, healthcare, and home purchases and other investments. On the other hand, Singapore doesn’t have Social Security or unemployment insurance, and private pensions are rare.

Whatever the differences, regret is a common sentiment in Singapore and the United States. What researchers wanted to know is: what is the source of that regret?

They tested two hypotheses. One is the human tendency to procrastinate and never get around to tasks that should be a priority. The other reason is largely outside of workers’ control: financial disruptions earlier in life that sabotage efforts to save, such as a layoff or large medical bill.

Employment problems, the researchers found, were a major source of saving regrets for 60- to 74-year-olds in both places but the impact was especially strong in the United States, which historically has had a more volatile labor market than Singapore. Disruptions that interfered with workers’ ability to save included bouts of unemployment and earning less than they were expecting. Early retirements and disabilities also led to saving regrets, as did unanticipated health problems and bad investments.

But procrastination as a reason for regret did not stand up to scrutiny. In this part of the survey, individuals agreed or disagreed with various statements designed to indicate whether they were procrastinators, including whether they work best under pressure or put off things they’re not good at. …Learn More


Silhouette of a detective with glasses

$4 Billion in Pension Payments Returned

It’s the employer’s responsibility to find former employees and keep them apprised of any retirement benefits they left behind.

But that hasn’t always worked out. Some employers don’t have former workers’ current contact information, and others don’t bother to track them down. Worst-case scenarios are often fallout from a merger: the company being acquired has kept shoddy pension plan records and the acquirer doesn’t update them.  Some companies have even deleted a participant’s name from the records.

Tyler Compton, an attorney with the Pension Action Center, which connects workers with lost pensions and 401(k) savings plans, said people frequently contact a former employer because they think they might have a plan. But if the worker is told he’s not in the records, he might drop the matter, she said.

The U.S. Department of Labor decided several years ago that employers’ efforts weren’t good enough. The department’s Employee Benefits Security Administration (EBSA) began investigating the problem and pushing companies to improve their methods for finding workers who had quit or been laid off but were owed pension benefits or had savings sitting in an old 401(k).

EBSA has gotten results. Since 2017, more than $4 billion in past due defined benefit pension payments have been returned to millions of plan participants.

By making clear what is expected of employers, regulators “put a lot of pressure, in a good sense, on plan administrators to really up their games,” Jeffrey Holdvogt, a legal partner with McDermott Will & Emery, said in a recent webinar hosted by the Pension Action Center at the University of Massachusetts, Boston. …Learn More

No-Benefit Jobs Better than Retiring Early

Woman in taxiMany workers in their 60s lose some of their stamina. Either their bodies start showing signs of wear, or they don’t tolerate on-the-job stress like they used to.

People who find themselves in this situation but can’t afford to retire will appreciate the findings in a recent study: older workers who transition to a new job – and perhaps a less demanding one – have greatly improved their retirement finances, even if the new job lacks health and retirement benefits.

The starting point for the analysis was to identify 61- and 62-year-olds employed in career jobs and follow the changes in their retirement finances over time, as they break into three groups. Some retired, some remained in longstanding jobs with benefits, and some found no-benefit jobs, whether with an employer or as an independent contractor.

Matt Rutledge and Gal Wettstein at the Center for Retirement Research compared each group’s retirement prospects in their early 60s with where they ended up years later, after the majority of them had retired. The focus was on the people who, at 62, were falling short of what they would need to retire comfortably.

The financial assessments were based on so-called replacement rates – estimated retirement income as a percentage of employment earnings. The average target required for financial security in old age is about 75 percent of past earnings, though the precise number depends on how much the individual earned.

The researchers estimated replacement rates for the 62-year-olds who fell short of the targets and estimated the rates again when they were 67 or 68. Retirement security improved over time for the under-prepared people who continued to work – in contrast to an erosion in security for the people who, despite falling short, had retired at 62 and locked in a small Social Security check.

The most interesting finding concerned the older workers who had extended their employment by switching to no-benefit jobs. Their retirement income in their late 60s replaced 68 percent of their past earnings, on average – still less than what they need but up dramatically from 52 percent if they had retired early. …Learn More


A group of millennials

Black Millennials’ Wealth is Sliding

Black Millennial Figure

It’s still too early to assess the full impact of the COVID-19 downturn on Millennials’ economic fortunes. But Black Millennials had already lost a lot of ground before the pandemic hit their communities hard.

Their wealth in 2019 was just half of what would be expected based on how much wealth their parents’ generation had at the same age.

Other Millennials are also running behind previous generations, but only slightly. And their situations have improved in recent years, while Black Millennials are sliding farther and farther behind.

The Federal Reserve Bank of St. Louis called the situation “alarming” in its new report.

The oldest Millennials are turning 41 this year. But in 2019, the typical Black family born in the 1980s had only $5,000 in their savings accounts, 401(k)s, home equity and other wealth – compared with the roughly $11,000 they would be expected to have based on the previous generation. Hispanic Millennials had $22,000, and whites had $88,000.

Black Millennials are struggling for a few different reasons, said Ana Hernández Kent, a senior researcher for the St. Louis Fed’s Institute for Economic Equity. Homeownership is a major source of wealth for most Americans, but only a third of them own homes – half the rate of their white peers.

Student debt is another big issue, because African-Americans who borrowed money for college either didn’t graduate or used the loans to attend lower-quality for-profit colleges at disproportionate rates. Their college experiences haven’t always translated to earnings that are high enough to justify the debt taken on to pay for an education.

“They’re over-leveraged,” Kent said. “Just over a third of Black Millennials with at least a two-year degree are more likely to say the costs of college are larger than the benefits.” …Learn More

 


Originally posted at https://squaredawayblog.bc.edu/tag/401k/

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