During the run up to a national election, it is always about hope and change and a competition of ideas. The 2020 election season is no different. A Democratic Party candidate, Pete Buttigieg, is proposing yet another way to help workers save for their retirement (https://storage.googleapis.com/pfa-webapp/documents/PFA_Retirement_White_Paper.pdf)
“Every worker who chooses to opt in to the Public Option 401(k) will have two accounts: a Rainy Day Account and a Retirement Account. Under the baseline savings plan, the worker could opt in to contributing 1.5 percent of their pay into their Rainy Day Account—and that worker’s contribution would trigger an employer contribution of 3 percent of pay into the worker’s Retirement Account. A 3 percent employer contribution is approximately the average maximum employer match currently available in 401(k)s. Workers can make extra contributions to either account, dial down their contributions, or opt out at any time.”
This approach is trying to solve two challenges. The first is a lack of non-retirement savings which often contributes to “leakage” through plan loans and hardship withdrawals. By carving out 1.5% of a worker’s income (we assume this is on a post-tax basis since it is not contribution to a qualified retirement account and is used as a rainy day fund), a worker would be saving for a rainy day. The second is a lack of retirement savings. By applying a baseline of 3% employer contribution, a minimum floor is established for a worker’s retirement savings.
What the industry has learned is that the single most successful retirement plan in the U.S. is the Social Security Retirement System. First, the program is compulsory with a 6.2% of wages contribution by each worker and a 100% match of 6.2% from the employer, totaling 12.4%. This is a defined benefit plan backed by the U.S. Government. The beauty is that it is simple and predictable. Moreover, it is a “default” without an opt-opt option. Although Mayor Pete’s proposal is well-intentioned, it will not move the needle. To have a fighting chance, the proposed program must act more like the Social Security System with simplicity and default without an opt-out feature.
Here is the InvestmentNews article.