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By Christine Benz | 05-03-2010 04:43 PM

Staving Off Retirement Shortfalls

Auto-enrollment in employer plans and automatic IRAs could dramatically improve retirement savings and participation, says the Heritage Foundation's David John.

Christine Benz: Hi, I'm Christine Benz from Morningstar. I'm here at the Investment News Retirement Income Summit and I am joined by David John. David is the senior research fellow for the Heritage Foundation. David, thanks for being here.

David John: Thanks for having me.

Benz: So, David, we have seen a lot of research indicating that today's pre-retirees have not saved what they need to have saved for retirement. And I know that you are a part of several working groups looking at solutions and ideas for helping pre-retirees cover their shortfalls. Can you talk about some practical solutions that you and your various research groups have come up with?

John: Well, the most important thing that we are learning is that people need to actually participate, and they need to participate from a young age and continue to save throughout their career.

Now the fact of the matter is that especially for low-income workers, younger workers, minority workers and women, that if you just leave it and say, "Well I know you can set up your own plan at some point or another," most people don't.

The number of people who just do their savings on their own is under 10%. So what we actually need is a national plan that includes great coverage because right now, only about of half of workers have a retirement plan at their work.

And we need to put in automatic features so that you are participating in your retirement plan unless you say no. You are investing a certain amount unless you say you want more or less and you are invested in a particular default investment option unless you decide you want to do something else.

And we have seen numbers already. For instance EBRI ran some numbers with this automatic thing. And for a lower income worker who is currently 25 to 29, the difference is on the voluntary plan where you do it all yourself, they will retire with something like 0.08 times, in other words 8%, of their last year's salary. That's basically...

Benz: No where near.

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