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Staving Off Retirement Shortfalls

Christine Benz

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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John: No where near. While with the retirement that has these automatic features, it will be up to five times your annual salary, which gives them a much better chance. For upper income workers, it moves from something like 2.5 times their final salary to 10 times their final salary. So we need to encourage automatic investment and automatic escalation where you save more each time and make that so that this is just an accepted practice.

Benz: So I know you, too, have been a pioneer in this concept of automatic IRAs, and it sounds like that idea is still alive. Can you talk about what it is and why you are so compelled by it?

John: Yes. The automatic IRA is something that Mark Iwry, who is now in the Treasury Department, and I developed. And what it is, is a small business retirement savings plan because as I said, about half of workers don't have the way to save at their work.

So this is a very simple, easy plan. You don't have to be an MBA for it to work right for you if you are worker. You don't have to be an insurance company or something like that as an employer for it to work out.

And it would fit. It would change the participation rate for retirement savings from roughly 50% of all workers saving for retirement to nine out of 10 saving for retirement. And we think that this has a major chance to increase the way that retirement saving is handled in the United States. It was endorsed by President Obama. It was endorsed by Senator McCain in 2008.

Benz: So this is also a portable vehicle, too. So if the worker left the employer, they could take it with them to the new employer?

John: Absolutely. And that's a key feature, because realistically what we need to have is a seamless retirement plan where your savings follow you from work to work. So this is an IRA, but if you go to work for a company that has a 401(k), you can just roll it right in or you can roll it out of a 401(k) and back into an IRA depending on who is employing you.

Benz: OK. Thanks, David. Compelling idea. Thanks for sharing it with us.

John: Thanks for having me.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.