Monday, April 22, 2013

403(b)izarre: Make It Automatic - What About Personal Responsibility? (Part III of IV)

In Part II of Make It Automatic I explored who might be against this program and why.  In this post I explore a common refrain I hear from smart people who may not have thought very much on the topic. (The intro is to this four part series is here)

What About Personal Responsibility?

Some believe the employer and associations shouldn’t be involved with encouraging school employees to save using “auto-enroll.” 

They feel it’s to paternalistic or none of their business.  

My response:

“Make It Automatic” is NOT a mandate, it has very simple opt-outs that every employee can elect if they choose.  Unlike a defined benefit plan, the participant is always 100% in control.  Should an employee find themselves auto-enrolled in a plan and then later decide they want to stop contributing, 
it’s simple to stop."

American’s have proven they won’t save on their own, they need a nudge.  I challenge anyone to find a retiring teacher upset with their decision to contribute to a defined contribution plan early in their career.

In most non-ERISA k-12 403(b) plans the participation rate is abysmal, hovering around 30%.  In my experience about 60% of those contributing are over age 50, another 25% are between 40 and 50 and less than 15% are under 40.  Those who are under 30 that contribute to a 403(b) are black swans (rare).  

To get the most out of retirement savings it pays to start early and yet almost NOBODY does.  Imagine the wealth that could be built by new school employees who are auto-enrolled.

Enrollment does not have to be at a high percentage.  The private sector often sees auto-enrollment rates at 6% or more with increases of 1% each year until the participant is around a 10% contribution rate.  

Given that most school employees have a defined benefit plan and sometimes Social Security, a smaller percentage or even a flat dollar amount could be used.

Employees who have a better financial outlook are happier, healthier and more productive - this leads to a better quality school program.

Employees who have saved for retirement are likely to retire earlier, allowing employers to replace them sooner with lower salary employees...saving the employer money.

Employees who have saved for retirement are likely to retire earlier and pose a smaller burden on underfunded pension systems.

“Make It Automatic” is a win-win-win - the employee wins, the employer wins and the pensions system wins.  Forget about paternalism, this program makes financial sense for every party involved.

Next week this series will conclude with Part IV of Make It Automatic and will deal with Fiduciary Responsibility.

Scott Dauenhauer CFP, MSFP, AIF
The Teacher's Advocate