The Simplest Fix

Alison Cooke Mintzer (photo by Chris Ramirez)

My daughters have been receiving an allowance since they were each around 4 years old. It gets divided three ways: spend, save and give. Spend and save are fairly obvious. Give is set aside all year, and, around this time, we collect the final sum, provide a parental “matching contribution,” and the girls pick a charity meaningful to them to receive their donation.

It’s always amazing for them to see the pool of money at the end of the year. In their eyes, it appears out of nowhere; after all, they were automatically enrolled into this charitable giving program, and a matching contribution somehow has been made. So when it’s time to use the money, they are pleasantly surprised.

Both elementary school-aged, they are already learning about what lies at the heart of the employer-sponsored retirement plan’s success—payroll deduction. They never see the money, never get to touch it and can’t inadvertently put it into another financial category.

Payroll deduction is yet another “do-it-for-me” prescription for the participant that we talk so much about—as is the case with automatic enrollment and automatic escalation features. This practice is why the retirement success of Americans hinges on access to a retirement plan at work—and why there have been bipartisan initiatives to allow for open multiple employer plans (MEPs), also why many states are now implementing or examining a state-run payroll deduction program.

Without the opportunity to “touch” the money, employees put it aside, and it grows without interference. This concept of payroll deduction and putting money aside before the earner can access it is also why the concept of leakage challenges the industry so much. Most people who have ever gone through a retirement plan rollover can attest to the challenges of having checks cut to them and having to move the money themselves from one account to the next.

At our PLANADVISER National Conference (PANC) in October, we had a session that discussed the concept of whether the nation faces a retirement crisis. With data from the Employee Benefit Research Institute (EBRI) and panelists Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association (DCIIA), and Tim Rouse, executive director of The SPARK Institute, the panel shared and discussed research that showed the real crisis is not for those with access to a plan at work, but for those without.

EBRI recently studied the accumulation phase of people up to the age of 64, taking into account not only their defined contribution plans but also their defined benefit (DB) plans, individual retirement accounts (IRAs), Social Security and housing equity. The data found that making plans available to employees is critical in savings success. Participants who have been eligible to participate in their DC plan for 20 years or more, and have done so, are on a pretty solid trajectory to not run out of money in retirement. EBRI projects that 94.7% of these folks in the highest income quartile, 87.7% in the third quartile, 71.3% in the second quartile and 35.9% in the lowest-income quartile will have adequate financial resources in retirement.

This sentiment about the value of workplace plans was echoed by PANC panelist Bob Reynolds in his new book, “From Here to Security: How Workplace Savings Can Keep America’s Promise.” In it he talks about the value of the current system and the need to protect it.

Of the near 40% of Americans lacking access to a payroll deduction savings plan, according to the Pew Research Center, their retirement replacement rates are approximately half of those for Americans with access to a defined contribution plan at work.

As a retirement plan adviser, you can help plan sponsors understand the vital part they play in helping America save. After all, for most Americans, it is only because of our workplace plans and our industry that they will amass any sort of savings in their lifetime.

Albert Einstein said compounding was the eighth wonder of the world. At least in retirement plans, payroll deduction may be the ninth.