As more and more baby boomers move closer to retirement age, and private pensions continue a decades-long shift from traditional pensions toward 401(k)s and other plans that place risk squarely on employees, a mountain of evidence shows that workers need to set aside more of their pay to achieve a secure retirement. With this in mind, California lawmakers are hoping to make the state one of the first in the nation to establish its own automatic retirement program for the more than 7 million workers who do not have access to a 401(k) or other savings plan at work.
The Secure Choice Board is responsible for providing the state legislature with detailed recommendations for this program by early next year. As part of its deliberations, the Board heard last week from a number of prominent experts from government, academia, industry, and the advocacy community as part of an Aspen Institute briefing.
Two of the nation’s top scholars on retirement policy, James Choi from the Yale School of Management, and Geoffrey Sanzenbacher from the Center for Retirement Research at Boston College, urged the Secure Choice Board to consider setting the automatic retirement contribution rate as high as 6 percent of workers’ annual pay. Most private companies’ 401(k) default rates are currently set at 3 percent.
Choi and Sanzenbacher presented research showing how principles from behavioral economics can inform key elements of program design. Choi revealed that the vast majority of 401(k) participants, when presented with a plan that automatically sets aside a portion of their paycheck, respond positively, staying in the program at the suggested level; this is true whether that rate is 3 percent or 6 percent.
Sanzenbacher shared results from a survey conducted in Connecticut, which is considering a Secure Choice program of its own, that showed those working for employers who do not currently offer retirement benefits will likely respond to defaults with similarly low opt-out rates. This is some of the first evidence we have that focuses squarely on the target population — those that work for employers that don’t offer retirement plans — and has important implications for understanding how to reach this historically underserved population.
Watch the full conversation from the briefing, below.
David Mitchell is program manager at the Financial Security Program (FSP) at the Aspen Institute.