Experts on retirement saving have plenty of assorted ideas for making 401(k) plans work better. But most agree on the top priority: get them into the hands of more people.

Only about half of private-sector US workers are covered by an employer-sponsored retirement savings plan at any given time—and that figure hasn’t budged much over the years. The lost opportunity to save at the workplace translates into far too many people retiring with paltry savings or none at all, leaving them reliant only on Social Security in retirement.

But what if we could make retirement savings accounts as universal as Social Security, which covers nearly all US workers? That could be done with a federally sponsored retirement plan that would automatically enroll all workers who don’t have access to a workplace savings plan.

Policymakers and lawmakers have tried to advance such a plan, including:

• The equivalent of a national 401(k) plan, which would feature a matching contribution from the government.
• A national version of the “auto-IRA” plans that have been enacted by 17 states. This would be similar to the 401(k) idea but wouldn’t include a matching government contribution.

In both cases, most employers who don’t offer their own plans would be required to enroll workers in the government option and to make payroll deductions.

This year marks the 50th anniversary of the Employee Retirement Income Security Act, the law that played an important role in the shift from traditional defined-benefit pensions to defined-contribution benefits and set the stage for the modern private-sector retirement benefit system. So, the time is right for a fresh look at these ideas.

Who Does the 401(k) System Work For?

The 401(k) has worked well for higher-income workers who have the wherewithal to contribute and take advantage of the system’s tax-deferral benefits. But it has left behind millions of workers at companies that don’t sponsor plans, or who come in and out of coverage as they change jobs throughout their careers.

The sporadic coverage is a key reason that so many people arrive at retirement with little or nothing saved. Most are disproportionately lower-income and people of color working for small businesses offering no retirement benefits at all.

“When researchers look at the large shortfalls in retirement wealth, they always come to the same conclusion,” says economist Teresa Ghilarducci. “The main reason is that about half simply are not covered at work by a plan. People are three times more likely to save when they can do it at the point when they are paid.”

Idea #1: An Automatic IRA Plan

Though no automatic IRA plans have come to fruition at the federal level, 17 states have run with the idea, enacting auto-IRA legislation that automatically enrolls employees lacking a workplace savings plan. Contributions are sent via a paycheck deduction to a state-sponsored plan that manages the investments; there is no matching employer contribution.

So far, eight of these states have launched auto-IRA programs. They are off to a good start, accumulating combined assets of $1.5 billion. That’s a small amount compared with the $11.1 trillion held in 401(k) plans in the first quarter of this year, but many of the plans are in their early phases, and many have not yet launched.

The most recent effort to enact a national IRA plan is the Automatic IRA Act of 2024. This legislation would:

• Apply to all employers with more than 10 employees.
• Start with a default contribution rate of 6%.
• Use target-date funds as the default investment choice, with an option to convert savings into annuity streams at retirement.
• Include a tax credit of $500 per year for employers who offer a plan.
• Offer savings options to gig workers.

The bill is sponsored by House Ways and Means Committee Ranking Member Richard E. Neal, and it enjoys broad support from business groups. Though the bill has not yet advanced in the Republican-controlled House of Representatives, it could come up for consideration if the political balance in Congress shifts in 2025.

Critics of the auto-IRA worry that they will crowd out private-plan formation by making it easier for employers to avoid the complexities of sponsoring their own plans. But the opposite actually may be happening.

“Sales of 401(k) plans have actually picked up appreciably when the state auto-IRA deadlines approach,” says Mark Iwry, who developed retirement policy for former President Bill Clinton’s administration and for former President Barack Obama’s administration, and he is now a nonresident senior fellow at the Brookings Institution.

“The message to employers is that they will need to pay attention and sign up, register and implement payroll withholdings,” he continues. “And, we can sell you a 401(k) plan that is better—you can contribute more, and you can add a matching contribution if you want to do that.”

Research by The Pew Charitable Trusts has found that the rate of private-plan creation in the first states to launch auto-IRAs is similar to—or better than—the rate in states without plans. Separate research by the financial technology firm Gusto, based on its own data, also points toward an increase in private-plan formation.

Idea #2: A National 401(k) Plan

A more ambitious public option idea would be a national 401(k) plan, featuring a government-matching contribution.

Progressive economist Teresa Ghilarducci has been pushing variations of this idea for years. Most recently, she teamed up with Kevin Hassett, who chaired the White House Council of Economic Advisors during former President Donald Trump’s administration, to propose The Retirement Savings for Americans Act.

The bill, which has bipartisan sponsorship in Congress, would establish a national savings program modeled after the huge federal Thrift Savings Plan, the retirement savings and investment plan available to federal employees.

The TSP—which reported $845 billion in assets last year—is widely regarded as one of the nation’s best workplace plans, mainly because of its very low costs, high-quality, simple investment menu and immediate auto-enrollment of new workers at a 5% contribution rate.

The RSAA would:

• Feature automatic enrollment and eligibility, with an initial contribution rate of 3% of pay.
• Make low- and moderate-income workers eligible for up to a 5% matching contribution via a refundable federal tax credit.

“If a worker is paying Social Security taxes, they also will be saving for retirement on top of that,” says Ghilarducci. “Saving would become as universal as Social Security.”

Iwry has argued that a federal plan featuring a matching contribution might cannibalize 401(k)s if employers opted to save money by dropping their plans. But Ghilarducci notes that most private-sector plans are more generous than the RSAA proposal, since its match is only available to workers with median or lower wages.

A national plan would also boost accumulation by reducing the tendency to withdraw money during periods of unemployment, she adds. That’s because the government would continue to make contributions even at times when the worker is not saving.

Idea #3: Multiple-Employer Plans

The Secure Act of 2019 included another initiative aimed at improving worker retirement coverage.

A provision of the law aims to make it easier for small employers to join together in multiple-employer plans, or MEPs, a sort of shared platform that aims to incentivize participation by reducing administrative and fiduciary burdens for individual small employers. It also creates a new subgroups of MEPs, called pooled-employer plans, or PEPs, which eliminates a restriction that participating employers share a common bond (such as industry or geography).

Growth of these plans has been slow. In 2022, MEPs represented just 0.6% of all private-sector retirement plans, which translates into about 6% of active participants, according to the Center for Retirement Research at Boston College. In 2023, there were just 75 filings for new PEPs, according to CRR’s analysis of data from the US Department of Labor, and there were another 18 through the end of March 2024.

Why has growth been so slow? It’s largely because of the challenges associated with marketing these plans to small employers, notes Anqi Chen, senior research economist at CRR, who has studied MEPs and PEPs.

“The small employer needs to be sold on joining,” she says. “It requires a lot of work and it’s not as efficient as selling to a single large employer. One salesperson can go to a large firm and maybe sign up 1,000 employees—with a PEP, it might be just 10 or 20 people.”

Another problem for all small plans is high administrative expenses, which translate into high fees for participants that cut into returns over time. MEPs and PEPs aim to bring down those costs, but Chen worries that this may not happen, at least in the short-term, noting, “It might take some time for PEPs to reach the scale that large employers enjoy.”

“I’m skeptical that this is going to be a game changer for coverage,” she adds. “But I’m happy to be proven wrong.”

Where Does Retirement Saving Go From Here?

Political battling has prevented the US from fixing its private-sector pension problems for more than a decade: Auto-IRA legislation was mothballed during the first term of former President Barack Obama after passage of the Affordable Care Act turned the word “mandate” into something toxic.

But best-practice nations protect retirement security through a mix of mandatory pension systems (Social Security, in our case) and privately managed savings. The US’ failure to create the latter is a key reason why we consistently score poorly in global comparisons of national pension systems. For example, the US system merits only a grade of “C” in the Mercer CFA Institute Global Pension Index.

If we had enacted a mandatory national savings plan a decade ago, the system already would hold billions of dollars in savings. It’s time to execute on these opportunities to help people prepare for retirement.

 

 

 

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