Maybe the U.S. should copy what the U.K. is doing with regard to retirement plans.
That’s according to a new brief from the National Institute on Retirement Security, which examined changes that the U.K. made to address its own retirement crisis—a “daunting retirement shortfall” that the British government sought to counter by requiring all employers to automatically enroll their employees in a retirement savings account.
Employers are required to contribute to the retirement plan if an employee participates, although individuals can opt out of participation. In addition, the U.K. also sponsors its own retirement plan—the National Employment Savings Trust (NEST)—so that all employers are able to offer their employees a plan.
All the changes are not yet in place, but are being phased in; the reforms are expected to be fully in place by 2018.
During the remainder of this year and throughout 2017, U.K. employers with 30 or fewer employees will enroll their employees in a plan. The program has already expanded coverage by six million workers, and the total increase in coverage of nine million workers is expected when the program is fully implemented in 2017.
“U.S. policymakers would be wise to examine the reforms the U.K. has implemented,” said Jennifer Brown, NIRS manager of research and coauthor of the report. Brown added, “We have a deep and serious retirement savings shortfall in the U.S., and legislative efforts that attempted to move the needle on retirement savings and coverage have failed.”
On this side of the pond, nearly 40 million (45 percent) of working-age households lack a retirement account, such as a 401(k) plan or an IRA.
That means that the typical U.S. working household has virtually no retirement savings. In addition, more than three out of five near-retirement households have less than one time their annual income saved for retirement.
According to the report, the typical working American household has minimal retirement savings—the median for all households is only $2,500—and for near-retirement households the amount is only $14,500. In addition, 62 percent of working households between the ages of 55–64 have retirement savings that don’t even add up to one year’s worth of the household’s annual income. That will never see them through retirement.
In the U.K., the report said, “half of households have nearly no savings or investments, with private sources of retirement income accounting for 49 percent of retirement income. Including both the public and private sectors, 62 percent of pensioners receive an occupational pension and 19 percent of pensioners receive a personal pension, similar to an IRA.”
Although in 2001, the U.K. required all employers with five or more employees to offer pension plans to their employees, employers weren’t required to contribute to those plans, nor were employees automatically enrolled.
But starting in October 2012, the U.K. launched a new retirement savings program that will require all employers to offer retirement plans meeting minimum requirements, contribute to those plans, and automatically enroll their employees into plans.
All employers who choose to not sponsor their own pension plan that meets the minimum requirements concerning employer and employee contributions are required to enroll their employees in the government-sponsored NEST plan.
“Ten years ago, Congress clarified that employers could use automatic enrollment features to nudge employees to save for retirement,” said Diane Oakley, NIRS executive director. Oakley continued, “But sadly, the rate of retirement plan coverage is lower today than it was in 2006.” In fact, said the report, “pension coverage rates have not shifted and have remained around 50 percent or less for decades.”
However, she said, the U.K.’s experience with its reforms “is proof for policymakers of the power of auto-enrollment when it’s working at full capacity.”
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