What GAO found
According to representatives interviewed by GAO of selected international retirement savings plans, most plans automatically allow qualifying employers to subsidize a portion of the workforce unless workers explicitly opt out. You have to register (see illustration). This automatic enrollment is intended to increase participation in the plan. However, those who are not automatically enrolled, such as some self-employed and part-time workers, are still difficult to cover. For example, a part-time employee must work for 24 months to be eligible for automatic enrollment in one of her plans considered by GAO.
Automatic enrollment of eligible employees implemented in selected plans
Selected retirement savings plans use government and employer incentives to encourage workers to join or stay with the plans, representatives said. Auto-enrollment plans encourage participation by offering employees tax incentives when contributing or withdrawing funds at retirement. Each plan also mandates or otherwise provides incentives for employer contributions. This can encourage employee participation and enhance retirement savings, according to retiree representatives. However, low-income workers may not receive tax benefits, and the self-employed may not receive incentives associated with employer contributions.
Some plans have set default contribution rates and investments to encourage employee participation and remove potential barriers to savings.Almost all Selected Retiree representatives say the plan uses a default contribution rate of 3-5% of workers’ salaries, simplifying important investment decisions about contribution amounts. The plan also offers default investments that combine high-risk and low-risk funds to balance risk and growth, including target-date funds that adjust based on the employee’s projected retirement date. Default investments may be particularly important for workers with low financial literacy, according to representatives interviewed by the GAO.
Selected plans also provide participants with the flexibility to adjust or access savings based on life circumstances, such as financial hardship. For example, some plans allow early withdrawal of retirement benefits. However, representatives pointed out concerns that if participants withdraw too much money too quickly, they risk running out of money after retirement.
Why GAO did this study
The United States faces a variety of challenges regarding how to secure retirement income for its aging workforce. As traditional pensions have become less common, more individuals have taken on the responsibility of managing their retirement savings. In doing so, they may face the challenge of accessing retirement plans through their employer. Accumulate enough retirement savings. And ensure that your accumulated savings will continue into retirement. Other countries are beginning to tackle similar challenges with various reforms to their retirement systems.
This report describes the views of international retirement representatives on policy options and trade-offs from account-based retirement savings reforms in other countries aimed at improving retirement security. These include (1) automatic enrollment of employees into retirement savings plans; (2) financial incentives for employee contributions; (3) Default plan options. (4) planning flexibility; His GAO report on these reforms is not an endorsement of any particular reform.
GAO interviewed representatives about their retirement plans in five selected countries: Canada (at federal level and Quebec), Lithuania, the Netherlands, New Zealand, and the United Kingdom. GAO selected plans based on a variety of strategies used to expand retirement plan coverage, recommendations from knowledgeable stakeholders, and comparability with the United States.
For more information, please contact Tran Chau (Chris) T. Nguyen at (202) 512-7215 or nguyentt@gao.gov.
