GAO report examines defined contribution plan use
Defined contribution (DC) plans—such as 401(k) plans—are now the dominant form of retirement plans for U.S. workers, yet 60 percent of all households have no retirement savings in a DC plan, and that poses retirement security challenges for low-earning households that rely on Social Security as their only source of retirement income.
These and other findings are highlighted in a U.S. Government Accountability Office (GAO) report prepared for Senator Patty Murray, Ranking Member of the Committee on Health, Education, Labor and Pensions. The report, titled “Retirement Security: Low Defined Contribution Savings May Pose Challenges”, focuses on recent trends in DC plan participation and savings, how much households could potentially save in DC plans over their working careers, and how key individual and employer decisions affect savings.
GAO Findings
The GAO analyzed household financial data from the Federal Reserve’s “2013 Survey of Consumer Finances”, the most recent data available, and found that most households (60 percent) have no DC plan savings, a 3 percent increase from 2007. When the GAO limited its analysis to working households—defined as households in which at least one person is working, but is not self-employed, and the head of household is between the ages of 25 and 64—it found that 34 percent of working households had neither a DC or defined benefit (DB) plan. For households age 55 and older, an estimated 29 percent had neither a DB plan nor a DC plan, and would need to rely on Social Security as their main or only source of retirement income.
The good news is that 61 percent of working households have access to a DC plan, and when provided access to a plan, 86 percent of working households participated in the DC plan. The not-so-good news is that 39 percent of working households do not have access to a DC plan, either because their employer does not offer a plan or they are ineligible to participate.
Low-earning and minority households have less access to DC plans compared to other income groups, which results in low DC plan participation and savings. The GAO found that about 35 percent of low-earning working households had access to a DC plan compared to 80 percent of high-earning working households. Among minority households, 35 percent of Hispanic households and 56 percent of Black households had access to a DC plan. But when given access to a plan, an estimated 64 percent of low-earning working households, 80 percent of Hispanic households, and 81 percent of Black households participated in the plan, compared to 95 percent of high-earning working households.
As a result, low-earning and minority working households have much less retirement savings in a DC plan. Among working households, only 25 percent of low-earning households had savings in a DC plan, with an estimated median account savings of $10,400, compared to the 81 percent of high-earning households that had savings in a DC plan, with a median account savings of $201,500. Among Hispanic households, 31 percent had savings in a DC plan with an estimated median account savings of $18,900. And, for Black households, 47 percent had savings in a DC plan with an estimated median account savings of $16,400.
The GAO report found that projected DC plan savings at retirement vary widely by earnings. Based on GAO projections, households on average would save enough in their DC plans over their working career to generate a monthly lifetime income of $2,970, but low-earning households would save enough to generate a monthly lifetime income of only $560. These low-earning households—especially the 35 percent who have no DC plan—are much more likely to rely on Social Security for the bulk of their retirement income.
Ways to Raise DC Plan Savings
The GAO report indicated that employers could help raise participation rates by sponsoring a DC plan if they do not currently sponsor a plan. And, employers that currently offer a plan could help raise participation rates by offering automatic enrollment—whereby individuals are automatically enrolled in the plan unless they opt out—and allowing for immediate eligibility and immediate vesting. Taking these steps would significantly increase the percentage of low-earning households with DC plan savings at retirement.
Individuals could help increase their DC plan savings at retirement by participating in a plan if they are offered one at work, transferring or rolling over their DC plan assets to another tax-advantaged account upon leaving employment (rather than taking a distribution), and maximizing their employer match by contributing the amount needed to receive their employer’s maximum matching contribution. The GAO report found that taking full advantage of the employer’s maximum matching contribution would increase DC plan savings at retirement by 31 percent for low-earning households.
While taking these actions will help increase DC plan savings at retirement for low-earning households, many low-earning households will still have no DC savings at retirement, in part because low-earning households are the least able to save for retirement. That poses retirement security challenges for low-earning households as they are forced to rely on Social Security as their only source of retirement income.
Implications for Credit Unions
The GAO reports finding, that more than one-third of working households have neither a DC or DB plan, has significant implications for credit unions, as many of these households are credit union members. Following are actions credit unions can take to help their members ensure a more secure retirement.
- Offer a simplified employee pension (SEP) plan or a savings incentive match plan for employees of small employers (SIMPLE) IRA plan to small business members that do not currently offer a retirement plan for their employees.
- Educate members of the importance of transferring or rolling over their DC plan assets to another tax-advantaged account (such as a credit union IRA) when changing jobs, rather than cashing out the plan.
- Offer a no-fee IRA with a low-minimum balance requirement to help low-earning households that may not have access to a DC plan at work to save for retirement.
- Make a payroll deduction option available to help members save for retirement on a regular basis.
The GAO report makes no specific recommendations—but its finding that most households have no DC plan access and that low-earning and minority households have much less retirement savings in a DC plan compared to higher-earning households—is certain to draw increasing scrutiny on the cost and effectiveness of retirement savings tax incentives as Congress prepares for comprehensive tax reform.
