What the GAO found
According to GAO officials interviewed about some international retirement savings plans, most plans require eligible employers to automatically enroll a portion of their workforce, unless workers explicitly opt out. (see figure). This automatic enrollment is intended to increase participation in the plan. However, those who are not automatically registered, including some self-employed and part-time workers, remain difficult to cover. For example, part-time employees must work for 24 months before becoming eligible for automatic enrollment in a GAO-reviewed plan.
Automatic enrollment of eligible employees, as implemented in selected plans
Representatives say selected retirement savings plans use government and employer incentives to encourage workers to join or stay in a plan. Auto-enrollment plans encourage participation by offering certain tax advantages to employees, either when contributing or when withdrawing funds in retirement. Each plan also mandates or otherwise incentivizes employer contributions, which pension representatives say can encourage employee participation and bolster retirement savings. However, low-income workers may not benefit from certain tax advantages and the self-employed do not benefit from the incentives associated with employer contributions.
Some plans have set default contribution rates and investments to make it easier for employees to participate and remove potential barriers to saving. Almost the whole of the selected the plans use default contribution rates between 3 and 5 percent of a worker’s salary, according to pension representatives, which simplifies a key investment decision on how much to contribute. The plans also offer default investments that combine high- and low-risk funds to balance risk and growth, such as target date funds that adjust based on a worker’s expected retirement date. According to GAO representatives interviewed, default investments can be particularly important for workers with low levels of financial literacy.
Selected plans also provide flexibilities for participants to adjust or access savings based on life circumstances, such as financial hardship. For example, some plans allow early withdrawal of retirement funds. However, representatives have raised concerns that plan members who withdraw too much of their money too early risk running out of funds later in retirement.
Why GAO Did This Study
The United States faces a series of challenges regarding how to provide retirement income security for our aging workforce. As traditional pensions have become less common, more and more people are responsible for managing their own retirement savings. In doing so, they may face difficulties in accessing pension schemes through an employer; accumulate sufficient retirement savings; and ensure that their accumulated savings last until retirement. Other countries have started to address similar challenges with various reforms of their pension systems.
This report describes the views of international pension advocates on the policy options and trade-offs of account-based retirement savings reforms in other countries aimed at improving retirement security. These include (1) automatically enrolling employees in retirement savings plans; (2) financial incentives for employees to contribute; (3) default plan options; and (4) plan flexibilities. GAO reports on these reforms do not imply endorsement of any particular reform.
The GAO interviewed representatives about pension plans in five selected countries: Canada (the federal level and the province of Quebec), Lithuania, the Netherlands, New Zealand and the United Kingdom. The GAO selected the plans based on the range of strategies used to increase pension plan coverage, recommendations from knowledgeable stakeholders, and comparability with the United States.
For more information, contact Tranchau (Kris) T. Nguyen at (202) 512-7215 or [email protected]