The first major retirement legislation since 2006 is moving through Congress but all sides agree that much more will need to be done to help young savers.
“Far too often we see a situation where policy people or political people or the like solve part of the problem and then dust their hands off and say, all right, well that takes care of that.” says David C. John, a senior strategic policy advisor at the AARP Public Policy Institute. “Making a start is important, but it's important that we continue to look at the other aspects."
According to a recent report by the National Institute on Retirement Security, two-thirds of working millennials have nothing saved for retirement. It gets even worse when you go deeper in the numbers: just 5% of working millennials are saving for retirement at the pace recommended by financial experts.
"Millennials are a generation that have vastly different attitudes and habits than previous generations. So naturally their lives and their financial milestones may look different than previous generations" says Dara Luber, senior manager of retirement at TD Ameritrade.
Pushing employers towards auto-enrollment
For many experts, automatic enrollment is the key change that could get young people in the habit of saving.
“Something like automatic enrollment actually is a huge game changer because it increases the proportion of younger people who save up to the average, which is 80% to 90%” says John. “This is the easiest way to help people to start to save early."
Automatic enrollment has grown since 2006. According to Vanguard – one of the countries largest 401(k) providers – the number of their clients choosing automatic enrollment has tripled between 2007 and 2017. As a recent report notes, “at year-end 2017, 46% of Vanguard plans had adopted automatic enrollment.”
The state of Oregon is pushing the issue even further with a program that automatically enrolls workers into an IRA if their employer does not offer a retirement plan. “It can be intimidating and complicated,” notes Oregon State Treasurer Tobias Read, “but OregonSaves has been really powerful in getting people started.”
Jennifer Brown, a researcher at UnidosUS who has studied the issue extensively, is supportive of Oregon’s plan and similar ones in Illinois and California. But she is also concerned these plans don’t go far enough. ”Is that going to be enough? I'm not sure. I hope so,” she says. “I really hope that these plans really help people save for the first time, because this is really reaching parts of the population that have never, ever been able to save for retirement savings plan at work."
The plans being debated in Washington have limited measures to encourage the practice, including giving employers tax credits for plans that include automatic enrollment.
Closing the eligibility gaps
Eligibility is another issue raised again and again. According to Brown, "eligibility is really a problem here. You have a lot of workplaces that might have access, but people still work at those places might not actually be eligible to participate in those plans.”
In fact, eligibility was cited by 51% of millennials as the reason for why they are not participating in their company’s defined contribution plan, according to a Pew analysis. Some employers don’t allow workers to enroll in a 401(k) plan depending on how long they’ve been at the company or how many hours they work per week.
Even a short waiting period can drop enrollment dramatically. "There's not a lot of awareness or followup from employers when someone becomes eligible to participate in that plan” Brown said. “That worker has to know what the eligibility requirements are, figure out when they're eligible, and then also enroll themselves, which is really, really difficult."
The SECURE Act, which passed the U.S. House of Representatives in May, does have provisions to allow part-time workers to participate in plans for the first time. But the plan includes a waiting period that can stretch as long as three years.
Helping with debts, student loans or otherwise
One of the thorniest issues is whether to link debt with retirement savings. Speaking of young people, Luber noted that ”half of all millennials have credit card debt, about 4 in 10 have car loans, and almost 4 in 10 are coming out of college with student loan debt. On average, they are holding nearly $15,000 in debt."
One idea with support on both ends of Capitol Hill is a plan to allow employers to make matching contributions to an employee’s retirement account equal to the amount of their student loan payment.
Advocates say it would help young people not miss out on a 401(k) “match,” but others are skeptical. “Why aren't we fixing the tax code so that employers can actually just pay people’s student loans directly rather than just try and do this round-about system,” said Brown.
How much the plan will help those with lower incomes is another question. Shai Akabas, who steers the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings, notes that “it is important to consider the equity implications, because on average students with higher incomes tend to have more student debt” but he is supportive of the measure as part of a “broader discussion about how we can increase access and savings for Americans across the income distribution.”
Sen. Ron Wyden is one of the main Senate advocates of the student loan plan. In a new release, he noted that “while a comprehensive response to the student loan debt crisis is needed, this policy change is an important piece of the puzzle.”
On the presidential campaign trail, Sen. Cory Booker has released a plan to provide $1,000 grants to every baby born in the U.S, on a sliding scale depending on the family’s income. The money could be used for a variety of purposes, including retirement.
Changing young people’s expectations on savings
More understanding of the system is a final piece often pointed out by experts.
In a TD Ameritrade survey of young people, Luber found a disconnect. On the one hand, 7 in 10 young people “see themselves as savers” and, on average, plan to retire at age 56. But many respondents to the same survey aren’t taking measures to accomplish their goals. “On average, they don’t plan on starting to save for retirement until age 36” says Luber. As any financial planner could tell you: the math there doesn’t add up.
Yet Luber remains optimistic: ”Millennials and Gen Z actually do want to save if given the opportunity. They do want to save, they want to pay down their student loans, they want to make ends meet.”