NCPA - National Center for Policy Analysis

THE NEXT GENERATION

November 29, 2005

Today's workplace savings plans need upgrading. Typically, these plans now provide for a voluntary "opt-in" and a wide array of investment options. Most plans offer to "match" employees' contributions up to a point -- a powerful incentive to join, says Robert L. Reynolds, vice chairman and COO of Fidelity Investments.

But, we need make just a few, key structural changes in the design of workplace savings plans themselves:

  • Next Generation plans should enroll all of their eligible participants automatically, through what is known as "negative election." As they do, participation rates surge, often by 30 percent or more, and most workers actually welcome the push to get started toward retirement readiness.
  • We should embed automatic escalation of employee contributions into Next Generation plan designs, setting the initial contribution rate high enough to capture the full employer "match," then rising in tandem with future pay increases. Companies that do this today see savings rates rise significantly, almost painlessly, and with most workers' approval.
  • Next Generation plans should offer workers well-proven "lifecycle" investment strategies (using mainly stock investments in a person's early working years then shifting steadily to more fixed-income holdings over time) as their first choice, not merely as the default option that more and more companies are already adopting.

Next Generation plan design won't by itself solve all of our retirement challenges. But a few effective words from policymakers in Washington could speed the adoption of a much more robust workplace savings system for America. Within just a few years, one plan at a time, Corporate America and financial service providers could go far to "inoculate" about half of all workers against the risk of elderly poverty, says Reynolds.

Source: Robert L. Reynolds, "The Next Generation," Wall Street Journal, November 28, 2005.

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