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Benefits October 26, 2023
Despite Savings Shortfall for Public Sector Workers, Automatic Options Yet to Catch On
Research from the MissionSquare Research Institute shows that with defined benefit pensions not providing enough for full retirement, plan design could help participants save additional funds in defined contribution plans.
Reported by Noah Zuss
Adding automatic escalation could help state and local government defined contribution plan participants mitigate retirement savings shortfalls, according to a new report from the MissionSquare Research Institute.
While 17 DC plans in states and the District of Columbia have added automatic enrollment features over the past 15 years, few have used automatic escalation, the institute’s recently published report found.
State and local government employees are more likely than counterparts in the private sector to continue to have access to a defined benefit plan, yet many still face retirement savings shortfalls.
Despite the demonstrated need for additional savings, “few state and local governments have adopted automatic escalation, as government officials may be hesitant to move forward without explicit statutory authority,” MissionSquare stated in a press release accompanying the findings. “In the private sector, however, automatic enrollment is becoming a standard practice, with two-thirds of DC retirement plans incorporating automatic escalation.”
The SECURE 2.0 Act of 2022 requires all new 401(k) and 403(b) plans, beginning in 2025, to use automatic enrollment with a default rate of between 3% and 10% and automatic escalation of 1% per year up to a maximum of at least 10%, but no more than 15%.
Automatic enrollment and automatic escalation are design features applied to DC plans for the purpose of increasing participants’ retirement savings. In automatic enrollment, plan sponsors automatically enroll employees in a DC plan at a default contribution rate and in a default investment. Automatic escalation automatically raises participants’ contribution percentage at regular intervals, usually annually up to a predetermined maximum contribution level. Employees may opt out of both options.
At state and local governments, continuing resistance or indifference to adding auto-escalation persists, including the perception that the savings tools are overly paternalistic, financially burdensome for employees or unnecessary, the MissionSquare report stated.
Yet National Institute on Retirement Security research, published last year, showed that pension plans alone often do not provide retirement income adequacy for state and local government employees. The researchers found that a public-sector worker with a pension, who also pays into Social Security and has access to a retiree medical plan, will need to save 4% to 6% of pay annually to fund an adequate retirement.
To reach optimal retirement readiness, relying exclusively on a defined benefit plan is insufficient, stated Deanna J. Santana, acting CEO and president of MissionSquare Retirement, in a statement that accompanied the research. The reasons may vary from a smaller defined benefit multiplier (the percentage of a vested and retired participant’s base pay they would receive in retirement for each year of service) and reduced employer contributions for retiree health care to a higher minimum retirement age and the reduction or elimination of cost-of-living adjustments by state and local governments, but the outcome is the same.
“Relying solely on their pension for financial security during retirement is no longer a viable option,” Sanatana said of public sector employees.
