Researchers Suggest Boosting Retirement Plan Access

The most effective way to increase participation in retirement plans is to provide all workers with access to one and automatically enroll them, a research report suggests.

A new issue brief, “Why Don’t Lower-Income Individuals Have Pensions?,” released by the Center for Retirement Research at Boston College, says about half of U.S. private sector employees do not participate in a retirement plan at their current job, and those not participating are more likely to have lower incomes.

The brief indicates the low participation rates of lower-income employees are driven primarily by weak labor force attachment and working for a firm without a pension. Only about half of lower-income individuals are working and, among those who are working, only about 60% work for firms that offer a pension. Eligibility and take-up rates among the lower income also help to explain their low participation.

Data for lower-income individuals ages 50 to 58 from 1992 to 2010 who were under 300% of the poverty line shows 42%, on average, were working, 44% of those worked for an employer that offered a 401(k), 84% were eligible to participate, and 78% of those eligible voluntarily participated in the plan. This results in a 401(k) participation rate of 12% for all individuals.

The researchers suggest policy reform requiring all employers to offer an automatic IRA program to their workers, similar to the proposed myRA program (see “myRA Program Details and Intent”). If such a policy was in place, the offer, eligibility and participation rates for those working are assumed to rise to 100%. The participation rate for all lower-income individuals would be, at most, 42%.

The authors also recommend policy pairing automatic IRAs with automatic-escalation of savings rates to help ensure participants are putting enough aside for retirement. However, they caution that even with universal pension coverage in the workplace, there would still be a fraction of lower-income individuals without coverage due to their low employment rates, thus prompting the need for measures to increase employment.

A copy of the issue brief can be downloaded here.