Sometimes dubbed the “Godfather of Auto-enrollment”, no single person has had more influence on retirement policy over the past three decades than Mark Iwry. As a senior official in two administrations, a researcher, and attorney, Mark has helped shape the retirement system with vision, care, and pragmatism. He agreed to discuss a current hot topic in retirement policy circles: addressing workers’ near-term financial insecurity through defined contribution plans. His answers have been condensed and edited for clarity.
You’ve been writing and advocating for short-term or emergency saving. With the Federal Reserve reporting that a third of the country wouldn’t cover a $400 emergency by tapping savings, is it a good idea for the employer-based retirement system to add a focus on short-term savings?
In my view, yes. Of course, as a practical matter, short-term saving has always been an element of the employer-based retirement system as millions of 401(k) participants take plan loans, hardship withdrawals, and, most of all, when changing jobs, receive and often consume lump sums and cash outs. Instead, I think it’s both desirable and feasible for us to build short-term saving into the retirement saving system in a more deliberate, well-designed, well-managed way. This would use our existing saving infrastructure to more effectively help people meet their very real and frequent needs for emergency or short-term saving. This approach could also increase retirement and other long-term saving. We could reduce leakage of retirement savings by explicitly separating and distinguishing short-term from long-term saving through separate “buckets” or accounts. So it’s desirable now to migrate from de facto to deliberate, to minimize retirement savings leakage. Enabling short-term saving within retirement plans is by no means the only way, and of course millions of workers are not eligible for such plans. The alternatives of using depository institution accounts, payroll cards, and other non-401(k) approaches are also promising and are being developed, including solutions outside the workplace. Everyone ought to have a convenient way to save for the near-term.
Should we worry that adding short-term, or emergency savings provisions to retirement plans might harm retirement savings, especially by low or moderate-income workers?
Concern about harming long-term retirement savings is well placed. A responsible approach must consider, how do we encourage emergency savings but not at the expense of long-term savings? As you in particular know so well, Tim, many people, especially those who live paycheck to paycheck, have such turbulent and fragile financial situations that they feel they cannot begin to think about long-term saving until they get their basic house in order financially. A short-term saving account—together with appropriate debt management and related financial wellness guidance of assistance—can help people get their short-term situation under control and begin to think that, if not immediately, at least soon, retirement or other long-term saving will no longer be a bridge too far. This population needs an option to allocate funds to long-term saving at the same time that they tend to their short-term, immediate financial needs. We can augment both long-term and short-term saving by coordinating these needs.
We can reduce leakage from retirement savings through well-designed vehicles for short-term saving. As the behavioral economists remind us, this can be done through separate mental—and actual—accounting, by having separate structures for different kinds of savings. Two buckets, two accounts, with different rules for accessibility can help reassure people that in many cases their short-term needs need not preclude long-term saving.
Is simultaneously saving for retirement and emergencies the only way? Might some people save now for tomorrow, and over time expand to long-term savings?
That’s exactly right. Over time, most people ideally should be able to engage in both short- and long-term savings. In any given month or year, they may need to focus on the short-term; but over time, many can engage in both. And both paths can be sustainable, with more secure short-term savings reinforcing and facilitating long-term savings by enabling people to better meet economic shocks, reduce volatility and disruptions in their financial lives, and have more peace of mind that they can put away money for the long-term, with a higher rate of return, accumulating on a tax-deferred basis.
You’ve spent decades enabling automatic enrollment into retirement plans. What are the lessons for conversations today about automatically enrolling workers into emergency savings tools?
In 1998, when my team at Treasury and I first approved and began to promote automatic enrollment in 401(k) plans, it was a novel idea, a bit audacious. Looking back today, one could say it’s always been obvious that workers should be automatically enrolled into 401(k) plans, at something like a 6% deferral rate, with automatic escalation. But for the first few years starting in the late 1990s, it was a lonely mission to persuade the retirement community to adopt auto features, including auto escalation and diversified default investments like balanced or target date funds. By the mid-2000s, though, it had taken off, and about a third of the larger 401(k) plans were using auto enrollment, with that share growing rapidly. At that point, we were able to persuade Congress to give auto a further boost by inserting some helpful auto enrollment provisions into legislation, the Pension Protection Act of 2006.
Ultimately, I see this as an encouraging story for those working to integrate well designed emergency savings features into retirement plans. Big change can take time and often meets initial resistance. I recall many conversations with major retirement industry figures, employers, and others in my early years working on automatic enrollment: “It’s a great idea, and I like it, but my clients won’t do it. Plan sponsors just don’t see the value for them.” Over time, the business case became clear, and today, over 70% of larger 401(k) plans use automatic enrollment.
Anything else to add?
A 401(k) can use automatic enrollment to make it easy for participants to simultaneously or sequentially save for the short- and long-term, tweaking auto enrollment to include a carefully limited amount of short-term or emergency saving. Just as an example, perhaps the first six months, or first $2,000 or $3,000, of a participant’s contributions might go by default into short-term savings, and thereafter contributions could automatically shift to regular long-term savings. As participants draw down emergency savings, contributions might automatically replenish that account up to a target the individual sets (or the plan sets by default).
These types of approaches, harnessing mental accounting and relying on two accounts or buckets, are more promising and seem less risky than approaches that draw little structural distinction between short and long-term savings—for instance, by automatically allowing everyone to freely withdraw up to a given amount from the long-term retirement savings account.
BlackRock’s Emergency Savings Initiative
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