Eleni Constantine, director of the Pew Health Group’s financial security portfolio, issued the following statement in support of legislation creating an “automatic IRA,” S. 3760, introduced by Sen. Jeff Bingaman (D-NM) and H.R. 6099, introduced by Rep. Richard Neal (D-MA).More info
A disarmingly simple concept—what we call the automatic 401(k)”—has thepotential to cut through this Gordian knot and improve retirement security for millions of workers through a set of common sense reforms. In a nutshell, the automatic 401(k) consists of changing the default option at each phase of the 401(k) savings cycle to make sound saving and investment decisions the norm, even when the worker never gets around to making a choice in the first place. Given the current structure of most 401(k) plans, workers do not participate unless they actively choose to. In contrast, under an automatic 401(k) they would participate unless they actively choose not to—and similarly for each major decision thereafter. Contributions would be made, increased gradually over time, invested prudently, and preserved for retirement, all without putting the onus on workers to take the initiative for any of these steps. At the same time, however, workers would remain free to override the default options—to choose whether or not to save, and to control how their savings are invested—but those who fail to exercise the initiative would not be left behind.
The steps involved in building an automatic 401(k) are not complicated, and the benefits could be substantial; indeed, a growing body of empirical evidence suggests that the automatic 401(k) may be the most promising approach to bolstering retirement security for millions of American families. A number of economists have undertaken important research and contributed practical suggestions concerning the actual and potential uses of automatic enrollment and related default arrangements in 401(k) plans. Drawing on their contributions, this policy brief describes the motivation for, the features of, and the potential benefits of the automatic 401(k).