When ‘More’ Retirement Readiness Is (Much) Less

A new study shows how a proposed government-run retirement program said to increase coverage could actually undermine the nation’s retirement readiness.

The report — by Morningstar’s Spencer Look and Jack VanDerhei (yes, that Jack VanDerhei) — considers the potential effects of the Retirement Savings for Americans Act (RSAA) on retirement-income adequacy for Generation Z and millennial workers. The proposed legislation — which aims to expand retirement coverage for American workers by creating a federal retirement plan for those not covered through their employer — has been introduced in both the House and the Senate.[i]?

The legislation has been positioned as a means of helping close the coverage gap — of creating not only an opportunity for those without access to a retirement plan at work to save for retirement, but to receive the incentive of a matching contribution from the federal government. How then, would such a proposal undermine the nation’s retirement security?

‘Under’ Mining

As it turns out, in a variety of ways.?

Structurally, and significantly, it directly competes with the existing private retirement system — providing an alternative that employers might well consider rather than adopting a new plan on their own.

That said, and even more significantly, it seems likely to encourage employers that already provide a plan — and matching contributions — to abandon those in place of the proposed government-run alternative.?

Finally, and compounding the damage of the first two, it does so with a structure that would not only have workers contributing less (generally speaking) than they do with the current system[ii] — and with a match that runs well below that found with the current system.[iii]?

The Damage Done

So, how much damage could this proposal wreak on the nation’s retirement security? The Morningstar researchers found that wealth could decrease by as much as 20% for Gen Z workers and 12% for millennial workers.

Those are some jaw-dropping numbers, to be sure — but the Morningstar researchers apply what seem to be reasonable, conservative estimates to get there.

First, since workers would be able to opt-out of this program, they assumed an opt-out rate roughly half that of the current state-run programs (that don’t have a match) — 20% (that’s about double the rate in private sector plans, which enjoy the backing and support of their employer as well as the convenience of payroll deduction).

More than that, one of the biggest assumptions in the researchers projected impact had to do with employer behaviors in response to the RSAA alternative — and here they used two different scenarios.? In one — a “best case” scenario — they assume that no plans with a thousand participants or more would do so (but that a third of those with less than a hundred participants, and a quarter of those with 100-999 participants would).?

However — the one that they said more likely represents the longer-term impact — they assumed anywhere from a third to 22% of employers of ALL sizes that currently offer a plan would abandon it.[iv]??

The Bottom Line

The research provides valuable insights as to the potential calamitous impact of this proposal on the nation’s retirement security — its introduction ironically just ahead of when some of the more impactful provisions of the SECURE Acts on new plan formation are scheduled to take hold.?

There is, however, yet another factor that could even more dramatically impact these projections — something that the bill’s sponsors have, for the very most part, avoided speaking to; how would this expansive government match program be paid for??

The answer to that question — which might well have an even more deleterious impact on retirement security — was at least hinted at a couple of months back by the RSAA’s sponsor Sen. Hickenlooper — who said that he’d be willing to lower 401(k) tax incentives and contribution limits to pay for this program.

Talk about robbing Peter AND Paul…

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[i] Sponsored by Sens. John Hickenlooper (D-CO) and Thom Tillis (R-N.C.), as well as Reps. Terri Sewell (D-Ala. 7th) and Lloyd Smucker (R-Penn. 11th), the bill is championed by the Economic Innovation Group (EIG), an organization founded by Napster and Facebook billionaire Sean Parker and Steve Glickman, former Senior Economic Advisor at the National Security Council under President Obama. Rocket Mortgage majority owner Dan Gilbert is a member of the organization's Founders Circle, an advisory board with no governance responsibilities.?

[ii] As the Morningstar study notes, the default RSAA contribution rate of 3% is significantly lower than typical contribution rates in DC plans. For instance, the average deferral rate in Vanguard’s "How America Saves 2024" report was 7.4%. Notably, even workers earning less than $50,000 per year had deferral rates of 5.1% or more.

[iii] “Additionally, employer matches for DC plans do not start to phase out for workers earning more than the median income level,” the study explains. “Therefore, for many workers, including those earning less than median income, participation in an employer sponsored DC plan would result in larger overall contributions than the RSAA federal account. Results for the RSAA improve when we assume federal program participants increase their savings rate to 7%, as those earning less than median income would get the full 5% federal match tax credit (the "Above Default Saving" scenario). However, while some participants would save at a higher rate, most participants are likely to contribute at the default. This is because the RSAA does not include an auto escalation feature, which is a key driver of the higher contribution rates seen in DC plans.”

[iv] “To elaborate, the RSAA would likely stymie new plan creation, and while the change may primarily affect smaller plans in the short term, we do think that access to plans, even with larger employers, would go down in the long run.”