We all know that saving for retirement is important. However, according to most nationwide reports and surveys, we still aren’t doing it: the Employee Benefit Research Institute reports that one out of every four Americans currently has less than $1,000 saved for retirement. What will it take to make more of us save for the future?
- More financial education?
- Eliminating excuses?
- Making it easier?
- Making it mandatory?
Lawmakers in California have decided to make it mandatory. Over the next few years, businesses with at least five employees who don’t offer their own retirement programs will be required to enroll them in the state’s Secure Choice program. Even though enrollment will be automatic, workers can opt out at any time (basically the reverse scenario of deciding whether to enroll in the first place). California’s plan is getting plenty of attention, but the idea isn’t new. Many other nations including Australia and the U.K. have similar programs, a few other U.S. states are already doing it, and many more are watching to see how it plays out.
There’s plenty of room for debate about how exactly these plans should work, whether they’ll be feasible for all income brackets, and how they’ll affect the private sector, but the basic concept is food for thought. The hope of mandatory programs seems to be the following:
- Having retirement savings programs initiated by employers who didn’t offer them before will give more people the option to save — especially those who aren’t aware or educated about other ways to plan for retirement.
There are still plenty of workers out there who don’t have an employer-offered 401K. Ultimately, we are all responsible for our own financial future, so this isn’t an excuse not to save – but it does require extra effort, an effort some people just aren’t able to make. Requiring employers to provide at least the state-initiated option for their employees would be at least something in the way of retirement planning for those who don’t have that security net in place.
- The fact that they’re automated (out of sight, out of mind) will eliminate some of the obstacles and excuses for not planning for the future.
For some people to make positive financial steps, no matter how simple, it’s easier if the decisions are made for them. The employees who never bother to opt into retirement savings programs available to them are also unlikely to opt out of one they’re automatically enrolled in. It’s savings by default, so to speak. This point lead to an important question. “Forcing” people who wouldn’t otherwise choose to save might help them grow a retirement nest egg, but is it really helping them grow in financial understanding and responsibility? Isn’t a sign of financial maturity learning to be accountable for finances, which includes retirement?
Editor’s Note: I believe nudging employees to save via this forced-saving method is a good idea even if the participants don’t immediately learn of its benefits. After all, the nest egg that the savings will build is going to help them no matter how bad they are with money now. And if the states run it like they are running the passive 529 plans, then I have high hopes that good solid investments will be available to build wealth long term.
There are many options, opinions, and possible repercussions with a mandatory state-initiated retirement savings program like California’s. But, in general, do you think retirement savings should be mandatory? Why or why not?
Editor’s Note: I’ve begun tracking my assets through Personal Capital. I’m only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it’s much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. For those trying to build wealth, Personal Capital is worth a look.