Executive Summary

Today’s private pension system works well for those workers who have consistent access to a plan and choose to save. One big reason retirement plans are effective in generating saving is the powerful incentives provided by immediate tax deductions and employer matching contributions. Another reason is infrastructure: employer-sponsored plans create the positive inertia of automatic payroll deductions while also managing the complexities of investment management at relatively low cost. These two key attributes -- incentives and an infrastructure for automatic saving -- is what needs to be replicated for all Americans.

Every working American needs access to both a potent tax incentive to save and automatic payroll deduction into a portable, professionally-managed account whether or not his current employer sponsors a retirement plan. The fact that so few workers save regularly in IRAs reinforces what demonstration projects in asset-building among low-income families have found: it is not primarily access to a savings account that spurs participation, but the three “I’s” -- Incentives, Infrastructure, and Inertia.

A Universal 401(k) would recast federal pension policy by adding:

• A tax incentive for saving that is more inclusive -- and potent -- by expanding the Savers Credit, making it refundable and directly deposited into an ICA.

• An account-based infrastructure that is citizen-based, rather than strictly employer-based, yet enables every worker to save by automatic payroll deduction.

• Default options that convert myopia into positive inertia, through automatic enrollment, automatic escalation, automatic payroll deduction, automatic asset allocation, and automatic annuitization.

Under a Universal 401(k) plan with these three key attributes, all workers not participating in an employer plan, including recent hires and part-time employees, would be automatically enrolled and contribute by payroll deduction, although an individual could opt out and choose not to save. The government would match voluntary contributions by workers and their employers with refundable tax credits deposited directly into the worker’s account. Workers participating in their employer’s plan would receive stronger tax incentives to save, but otherwise see no difference. Contributions for workers not participating in an employer plan would be forwarded to a federally-chartered clearinghouse, which would manage small accounts at low cost and could even convert account balances into guaranteed income for life at retirement. Individuals could maintain the account throughout their careers, since it would remain open as they moved from job to job. This supplemental system would make saving easier, automatic, and fair.

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