Helping Employees Build Savings

Consultants and academics who’ve studied the pension mess say it’s vital to encourage employees to save more on their own for retirement. That would take some pressure off corporate pension plans. Unfortunately, it’s not that easy. Since the early 1980s, employers have been doing this by providing defined-contribution plans such as 401(k) accounts, in which they agree to match a portion of workers’ tax-deferred savings, says Ed Ryan, a vice president at MassMutual Retirement Services. But workers aren’t saving enough. According to a recent article in The American Prospect, the average worker’s 401(k) account has just $20,000 in it–far too little to provide for a significant portion of the income he or she will need to survive retirement.

    One big problem, experts say, is young workers–whose early contributions conceivably could grow into a comfortable nest egg–don’t understand the importance of socking away money for tomorrow when they want the immediate gratification of a new compact-disc player today. That’s something that companies might be able to mitigate, perhaps by including some financial education in new employees’ orientation programs. But another big problem is that savings options are too complicated. “There are 16 different types of tax-deferred savings plans under the federal code,” says Paul Weinstein, a senior fellow at the Progressive Policy Institute in Washington, D.C. “People don’t understand the differences between them, and so they don’t feel comfortable. And you have a 401(k) and when you switch jobs, they offer you a check for $10,000 that you’d forgotten you had. It’s tempting just to spend that money, instead of continuing to save it.”

    Weinstein would solve the problem by consolidating all those options–Roth IRAs, regular IRAs and other plans–into one simple tax-deferred vehicle, the universal pension account. When workers switch jobs, the funds in their 401(k) plans would simply roll over into their universal pension accounts, without the need to fill out cumbersome paperwork to start another retirement account. He also views the universal pension as a way to help low-income workers. “The government could help people build their savings, either by depositing $500 in a person’s account or by providing a tax credit so that they could save some of their own earnings,” he says.

Workforce Management, October 2003, p. 55 — Subscribe Now!