A new issue brief from the National Institute on Retirement Security (NIRS) offers the first detailed analysis for U.S. audiences on the U.K.’s new retirement policy initiatives designed to stem the retirement crisis.
Faced with a daunting retirement savings shortfall, U.K. policymakers recently instituted a series of reforms that has expanded retirement plan coverage for workers. Could some of these innovative approaches be applied in the U.S. to strengthen economic security for American workers?
The U.K. reforms require all employers to automatically enroll their employees in retirement savings account. Also, employers are required to contribute to the retirement plan if an employee participates, although individuals can opt-out. The U.K. also sponsors its own retirement plan – the National Employment Savings Trust (NEST) – so that all employers are able to offer their employees a plan.
The new reforms are being phased in over time and will be fully implemented by 2018. During the remainder of 2016 and in 2017, U.K. employers with 30 or fewer employees will enroll their employees in a plan. Already, the U.K. has expanded coverage by six million workers. The total increase in coverage of nine million workers is expected when the program is fully implemented in 2017.
“U.S. policymakers would be wise to examine the reforms the U.K. has implemented. We have a deep and serious retirement savings shortfall in the U.S., and legislative efforts that attempted to move the needle on retirement savings and coverage have failed,” said Jennifer Brown, report co-author.
In the U.S., nearly 40 million – or 45% – of working-age households do not have a retirement account, such as a 401(k) plan or an Individual Retirement Account (IRA). This shortfall in retirement savings means that the typical working household has virtually no retirement savings, and more than more than three out of five near-retirement households have less than one times their income saved for retirement.
“Ten years ago, Congress clarified that employers could use automatic enrollment features to nudge employees to save for retirement. But sadly, the rate of retirement plan coverage is lower today than it was in 2006,” said NIRS Executive Director Diane Oakley. “The experience across the pond is proof for policymakers of the power of auto-enrollment when it’s working at full capacity. In fact, many U.S. states that are taking steps to help working Americans have a financial stability in retirement are considering similar automatic enrollment practices.”
Brown added, “As evidenced by the recent elections, middle class Americans are angry about their economic security, and retirement is a big part of that equation. If newly elected policymakers are going to deliver the economic security that they promised on the campaign trail, they will take action to address America’s retirement crisis. We hope this research contributes to a serious examination of policies in other nations that are working and making real progress towards closing the savings and coverage gaps.”
This research brief starts by discussing the goals of the new savings program. It then describes the phase in of the program, the requirement for auto enrollment, and the required level of contributions. Next, the paper discusses the NEST program and describes its various features with a focus on its default investment option. The paper concludes with comments about the phase-in of higher contribution rates and how that may affect future opt out rates.
• Download the NIRS brief here
About NIRS: The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Located in Washington, D.C., NIRS’ diverse membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers.