The next generation of automatic features in 401(k) plans will include default savings rates that will give workers switching jobs the option to choose between the new employer’s default savings rate or the one they had at their previous employer, if higher.
That was one of the innovations that Mark Iwry, a nonresident senior fellow at the Brookings Institution, predicts the industry will have within 24 months.
“We know how to do this, and it’s just a matter now of getting the industry to implement it and debug it,” he said during a panel discussion hosted by the Brookings Retirement Security Project on Feb. 13.
Iwry added that policy makers have started to work with Congress on making the feature part of SECURE 3.0, the yet-to-be determined retirement reforms that policy makers hope will build on the SECURE Act and the SECURE 2.0 Act.
Even if SECURE 3.0 does not move forward, Iwry is confident that the auto-provision will materialize.
“I think administratively we can get that done with some administrative guidance from Treasury and the IRS,” he said.
Fiona Greig, global head of investor research and policy at the Vanguard Group, bemoaned the fact that the current design of many 401(k) plans do not account for today’s mobile workforce, noting that workers typically switch jobs nine times over the course of their careers.
Greig explained that the median job switcher sees a 10% increase in pay but a .7 percentage-point decline in their retirement saving rate when they switch employers because they typically are defaulted to a savings rate that is lower.
Workers may have been auto-escalated to a savings rate of, say, 8%, 9% or 10%, but if their new employer’s default savings rate is 6%, they’ll be saving less than before.
Greig endorsed the idea of giving workers the option of saving at either the new employer’s default savings rate or their prior savings rate, if higher.
While policy makers have been meeting to formulate SECURE 3.0 “for the better part of a year,” the many priorities of the new Trump administration are likely to “override” retirement legislation, Iwry said.
“The retirement system is in a defensive crouch, kind of hiding in the tall grass,” he said.
