A Retirement Revolution? New Act Could Hurt Young Workers More Than Help

Legislators aim to bolster retirement savings for Americans with the Retirement Savings for Americans Act (RSAA). This bipartisan bill proposes a federal workplace retirement account, similar to a 401(k), offering tax advantages and investment choices. While seemingly beneficial for those lacking access to current workplace plans, a recent Morningstar study reveals a potentially significant unintended consequence: a substantial decrease in long-term wealth for many young workers, particularly millennials and Gen Z. The study suggests that the majority of Americans might be better off under the existing system. This article will delve into the proposals, their projected impacts, and what individuals can do to optimize their own retirement savings, regardless of the future of the RSAA.

Key Takeaways: A Retirement Act With Unforeseen Consequences

• The Retirement Savings for Americans Act (RSAA) aims to create a federal retirement plan for those without access to employer plans, but a Morningstar study suggests it could **reduce retirement wealth for young adults by up to 20%**.
• The RSAA features **automatic enrollment at 3% of income**, a **matching tax credit for low-to-moderate earners**, and **worker ownership of the account regardless of job changes**.
• The study highlights the risk of **lower contribution rates compared to existing employer plans** and a potential **decrease in the use of individual retirement accounts (IRAs)** due to the “default” nature of the government plan.
• The article recommends leveraging **portfolio automation and consistent contribution increases** to counter the effect of behavioral biases and maximize retirement savings.

What’s on the Table: Deciphering the RSAA

The RSAA seeks to address the retirement savings gap by creating a universal retirement savings vehicle. Here’s a breakdown of its key features:

• Automatic Enrollment: Full- and part-time employees lacking employer-sponsored plans would automatically be enrolled, contributing 3% of their income. Opting out remains an option.
• Matching Tax Credit: Employees below a specific salary threshold would receive a government match. This would involve 100% matching of contributions up to 3% of salary and 50% matching up to 5% of salary. This essentially acts as a significant government subsidy.
• Account Ownership: The account would remain the employee’s property, regardless of job changes ensuring portability and avoiding the loss of accumulated savings during employment transitions.

Potential Downside: A Shift in the Retirement Landscape

However, the Morningstar study raises concerns about the potential impact of this plan on the overall retirement landscape. The researchers predict many private companies might reduce or eliminate their existing retirement plans due to the presence of a federal alternative, leading to a concentrated workforce in a government plan with potentially **lower contribution rates** than current employer-sponsored plans. This would significantly affect the projected retirement outcomes for many individuals.

Spencer Look, Associate Director of Retirement Studies at Morningstar and co-author of the study, emphasizes the potential decrease in IRA contributions. “A lot of people would think of this federal plan as their [only] plan,” he says. “If this was enacted, there’d be a lot of media coverage, there’d be a lot of information out there, so people would likely be less likely to be saving to an IRA.“

How Morningstar’s Model Can Help You Become a Better Investor Now

Morningstar’s model incorporates a crucial element often overlooked in retirement planning: investor behavior, specifically the impact of inertia. People often remain passive with their default contribution levels, rarely increasing their contributions or actively seeking additional savings opportunities. This is partly due to a cognitive bias known as status quo bias.

Brad Klontz, CFP, financial psychologist, and author of “Start Thinking Rich,” explains, “Evolutionarily, people are wired to avoid risk and prefer things the way they are. For much of human history, things are kind of OK the way they are right now. So we have an aversion to making changes.“

Harnessing Inertia for Retirement Success: Automation is Key

While inertia can be detrimental to long-term savings, Klontz argues that it can be harnessed to one’s advantage. The key is to use automation to create a new status quo that works in your favor: “Do as much automation as you can do; automation is the status quo hack.”

This includes automating transfers from your paycheck or checking account directly into retirement accounts. It also involves increasing your 401(k) contribution gradually, ideally by 1-2 percentage points annually. This small increase, often unnoticed in the short term, can significantly boost your retirement wealth over time. Klontz suggests incorporating portfolio rebalancing automation to consistently sell high-performing assets and reinvest in under-performing ones maintaining optimal allocations.

Klontz concludes, “What’s so cool about it is that you only need to make the choice once.” By automating your savings and investment strategies, you establish a new, beneficial status quo that requires minimal ongoing effort while maximizing long-term returns.

The Future of Retirement Savings: Proactive Planning is Essential

Regardless of the RSAA’s ultimate fate, the Morningstar study underscores the importance of proactive retirement planning. The study’s findings highlight that the proposed federal plan, while intending to expand access to retirement savings, may not optimize the retirement outcomes due to lower contribution rates compared to other models. The study also warns against neglecting individual responsibility in securing financial security for the future. Individuals should prioritize consistent savings, informed investment decisions and leveraging financial planning tools to achieve their retirement goals.

The findings emphasize the importance of staying informed about retirement planning options, actively managing your savings and embracing automation where possible. By understanding the principles of behavioral economics and utilizing technology to automate investments and savings, individuals can navigate the complex world of retirement planning effectively. Ultimately securing a comfortable retirement for yourself relies on your active participation in shaping your own financial future.