The puzzle over how to strengthen retirement security isn’t
only an American problem, according to a report from the U.S. Government
Accountability Office.
The research, “Retirement Security: Recent Efforts by Other
Countries to Expand Plan Coverage and Facilitate Savings,” examines retirement
plans in five selected countries—Canada (at the federal level and the province
of Quebec), Lithuania, the Netherlands, New Zealand and the United Kingdom—and
informs policymakers of the strategies used to increase retirement plan
coverage, recommendations from knowledgeable stakeholders and comparability to
the U.S.
“This report describes the views of international retirement
representatives on policy options and trade-offs from account-based retirement
savings reforms in other countries, intended to improve retirement security,”
the report states. “These include automatic enrollment of employees in
retirement savings plans [and] financial incentives for employees to
contribute.”
The report examines retirement plans in countries that use
automatic enrollment to boost participation. In other words, most of the plans
require eligible employers to auto-enroll some workers unless they explicitly
opt out. According to the report, some self-employed and part-time employees
not auto-enrolled remain difficult to cover, but countries can boost
participation with shorter opt-out periods.
“Other countries also face challenges ensuring their
population’s retirement security and have begun to address these issues with
various reforms to their retirement account systems, and to defined
contribution retirement savings plans, in particular,” the report says.
The research was compiled at the request of Representative
Richard Neal, D-Massachusetts, chairman of the House Committee on Ways and
Means.
“Neal asked to review recent policy initiatives from other
countries that may help provide information to domestic policymakers as
lawmakers mull over ways to strengthen retirement security,” the report states.
Auto-Enrollment Overseas
The report highlights significant differences in how
auto-enrollment is used by the countries studied.
Since 2012, the Canada Pooled Pension Registered Pension
Plan has encouraged all employers to auto-enroll some employees. The Lithuania
Pension Accumulation Plan, beginning in 2019, required the government to
auto-enroll all eligible employees. New Zealand’s KiwiSaver required all
employers to auto-enroll new eligible employees starting in 2007. The Quebec
Voluntary Retirement Savings Plan has required some employers to auto-enroll
all eligible employees since 2016. Finally, the U.K.’s Qualifying Workplace
Pension Plans– the National Employment Savings Trust, or NEST—required all
employers to enroll all eligible employees starting in 2012.
The plans with auto-enrollment also offer incentives for
participation by providing some tax benefits to employees, either upon
contributing or when withdrawing funds at retirement, the report says. Every
plan studied also requires or otherwise offers incentives for employer
contributions, which “can encourage employee participation and bolster
retirement savings,” the research explains.
“However, lower-income workers may not realize some tax
benefits, and the self-employed do not receive the incentives that come with
employer contributions,” the report adds.
New Zealand representatives told the GAO that using
auto-enrollment for KiwiSaver has had a major impact on participation. For
example, more than 90% of participants remain in the plan once enrolled,
according to the report. In the U.K., the NEST program has achieved similar
results, as representatives explained that auto-enrollment has covered 10
million workers who were previously without a retirement benefit.
The NEST Insight annual research report for 2021 showed that
NEST started with a total of 1.1 million enrolled workers in 2013 to 2014, and
has grown to 14.8 million enrollments by 2020 to 2021, according to the GAO
report.
Quebec officials told the GAO that requiring employers with
more than 10 employees to enroll their workers in a workplace retirement plan
has boosted the number of participants enrolled. Since the province adapted
auto-enrollment in 2016, nearly 39,000 employers who did not previously offer a
retirement benefit to workers have been required to offer the Voluntary
Retirement Savings plan, according to the report.
“In contrast, officials from Canada—where employers are not
required to offer a Pooled Registered Pension Plan (PRPP)—said that uptake of
PRPPs has been limited. In addition, even when employers choose to implement
automatic enrollment, they may choose which groups of employees they enroll,”
the report states.
A GAO spokesperson says countries’ adoption of
auto-enrollment reflects lessons learned in how to engage with workers on
retirement planning.
“Insights from behavioral economics have helped plan
sponsors design strategies to help individuals reach their financial goals,”
the spokesperson says. “Such strategies include auto-enrollment,
auto-escalation and target-date funds. These strategies recognize the realities
of human psychology, including procrastination and inertia, as well as
difficulty in processing complex information, and steer individuals in
directions designed to increase their financial well-being.”
The plans nearly all selected default contribution rates
between 3% and 5% of a worker’s salary, retirement representatives said to GAO.
The default contribution rate for Lithuania’s plan is 3%; New Zealand, 3%;
Quebec, 4%; and the U.K., 5%. Canada does not use a single default
contribution.
Opt-Out Windows
The report says each country uses a different number of days
for employees to choose to opt out of contributing. It notes that the time
available to decide can drive participant behavior, and suggests that longer
opt-out windows may lead to higher numbers of workers leaving the plan.
“Of the three types of retirement savings plans for which
opt-out data were provided, information from the respective plan officials
suggests that the plan with the longest opt-out window had the highest opt-out
rate,” the report states. “Specifically, the UK’s NEST has an opt-out window of
1 month, and New Zealand’s KiwiSaver has a window of 42 days; each had recent
opt-out rates of around 10%. Lithuania’s Pension Accumulation Plan has an
opt-out window of 150 days and an opt-out rate of 39%.”
GAO researchers noted that the report is not an endorsement
of any policy. “GAO reporting on these reforms does not signify endorsement of
any particular reform,” the report states.
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