Saving for retirement is important – we all know that. But, according to most nationwide reports and surveys, we still aren’t doing it: the Employee Benefit Research Institute reports that one out of every four Americans currently has less than $1,000 saved for retirement. What will it take to make more of us save for the future?
- More financial education?
- Eliminating excuses?
- Making it easier?
- Making it mandatory?
California’s lawmakers have made it mandatory. Businesses with at least five employees who don’t offer their own retirement programs will be required to enroll them in the state’s retirement program. Even though enrollment will be automatic, workers can opt out at any time (basically the reverse scenario of deciding whether to enroll in the first place). California’s plan is turning heads, but the idea isn’t new. Many other nations including Australia and the U.K. have similar programs, a few other U.S. states are already doing it, and many more are watching to see how it plays out.
There’s plenty of room for debate about how exactly these plans should work, whether they’ll be feasible for all income brackets, and how they’ll affect the private sector. The basic concept is food for thought, though. The hope of mandatory programs seems to be the following:
- Having retirement savings programs initiated by employers who didn’t offer them before will give more people the option to save. This is especially true for those who aren’t aware or educated about other ways to plan for retirement.
There are still plenty of workers out there who don’t have an employer-offered 401K. Ultimately, we are all responsible for our own financial future, so this isn’t an excuse not to save. However, having to figure out which retirement savings account to open does require extra effort, a task some people just aren’t comfortable to make. Requiring employers to provide at least the state-initiated option for their employees would at least be something in the way of retirement planning for those who don’t have that security net in place.
- The fact that they’re automated (out of sight, out of mind) will eliminate some of the obstacles and excuses for not planning for the future.
For some people to make positive financial steps, no matter how simple, it’s easier if the decisions are made for them. The employees who never bother to opt into retirement savings programs available to them are also unlikely to opt out of one they’re automatically enrolled in. It’s savings by default, so to speak. This point lead to an important question. “Forcing” people who wouldn’t otherwise choose to save might help them grow a retirement nest egg, but is it really helping them grow in financial understanding and responsibility? Isn’t a sign of financial maturity learning to be accountable for finances, which includes retirement?
Editor’s Note: I believe nudging employees to save via this forced-saving method is a good idea even if the participants don’t immediately learn of its benefits. After all, the nest egg that the savings will build is going to help them no matter how bad they are with money now. The only caveat is that the investment options need to be low cost and created to the benefit of actual retirement savers. Otherwise, the program will only end up helping the financial industry. Take Hong Kong for example. They setup a mandatory retirement savings program for every employee called Mandatory Provident Fund (MPF) and it works much like the 401k. The only difference is that every employee are required to take a percentage of their paycheck and pay into the program. It all sounds good in theory but only high fee mutual fund options are available. What ends up happening is that the financial institutions all get rich off the investment fees that they charge to maintain the program and funds while the workers get shafted over and over. Why do I know this? I worked there as a summer intern for a couple years decades ago and my investments has not growth at all. AFTER DECADES! Luckily, the amount in the account is small as I was working for peanuts as a summer intern but can you imagine if I worked there full time?
There are many options, opinions, and possible repercussions with a mandatory state-initiated retirement savings program like California’s. But, in general, do you think retirement savings should be mandatory? Why or why not?
Editor’s Note: I’ve begun tracking my assets through Personal Capital. I’m only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it’s much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it’s free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.