What’s more, roughly 75 million Americans — more than 40% of the total labor force —work for employers that do not oer any type of payroll-deduction savings plan.
Defned-contribution plans are a strong base to build on
We have a strong dened-contribution (DC) workplace saving system that currentlyreaches more than 83 million workers — a number that continues to grow. And thereare 40 million workers covered by dened-benet plans. However, that number is notgrowing. This suggests to me that if we can strengthen the DC system and extend itsreach, we can take huge strides toward meeting the challenge of retirement nance. Andthere is every reason to believe that we can strengthen and extend the DC savings system.
American workers covered by DC plans
384862834042394042427520353802550751001980 1985 1990 1995 2000 2005 2008
DB plansDC plans
Sources: Private Pension Plan Bulletin, Abstract of 2008 Form 5500 Reports, U.S. Department of Labor,December 2010. Collective Bargaining Status of Pension Plans, Total Participants by Type of Plan.
Defned contribution plans have continued to evolve
The DC system has been changing and evolving for over 30 years. Ever since the rstgeneration of 401(k) plans emerged in the 1980s — what I refer to as “WorkplaceSavings 1.0” — we’ve seen innovations such as loan options, daily valuation, multipleinvestment choices, lifecycle funds, and dozens of others. And with the passage of thePension Protection Act of 2006 (PPA), we took a giant step toward making the 401(k)plan — and DC plans generally — America’s
retirement system. PPA endorsedthree game-changing elements of workplace savings-plan design: automatic enroll-ment, savings escalation, and asset allocation guidance. What’s more, PPA gave plansponsors adopting these elements strong legal protection against litigation.As a group, these core elements of plan design marked a qualitative shift, which is why I referto the post-PPA era as “Workplace Savings 2.0.” Today, the evidence of these policy innova-tions is clear: we have essentially solved the challenge of retirement accumulation.Recent research shows that young workers should be able to replace between 40%and 60% of their pre-retirement incomes provided that their DC plans enroll themautomatically, increase their savings from about 6% to 10%, and guide them to age-appropriate asset allocations, mostly through lifecycle funds. And this is beforecounting Social Security, other savings, home equity, life insurance, or any otherassets these workers may have. In other words, these post-PPA auto-enrollmentplans really get the accumulation job done — provided employees start with adeferral of at least 6% and escalate from that level.
PPA endorsed three game-changing elements o workplace savings-plandesign: automatic enrollment,savings escalation, and asset allocation guidance.