The 25th largest country


What’s bigger than South Korea, but smaller than the United Kingdom? Answer: the 57-million-strong population of Americans who go to work every day but don’t have access to an employer-sponsored retirement plan. (Technically it could also be Italy or Burma, but bear with us.)

We’ve always been committed to “financial freedom for all.” We’ve also been frustrated that in our industry, ‘all’ usually means 401(k) plan participants. That’s why we’re bringing our managed account expertise to IRA investors. It’s also why we’re excited that AARP is stepping up to serve the vast population of those without 401(k)s by promoting a solution that they call “Work and Save.”

Essentially an IRA funded by automatic payroll deductions, this savings vehicle adds hands-off convenience and a strong behavioral nudge to the well-known benefits of pretax retirement investing. Most importantly, it makes a solution potentially available to every employee nationwide.

In the form that AARP is supporting, the plans would be sponsored by state governments, funded through employer payrolls, and managed by financial services firms. The accounts themselves would be owned by individuals, and so fully vested and entirely portable.

Before anyone gets bent out of shape about government meddling or burdens on business, note the scheme would also be fully paid for by account holders. The states would provide little more than legislative authorization. Businesses would have to set up payroll deductions, but that’s no more difficult than, say, offering flexible spending accounts as an employee benefit. And streamlined plan design, low-cost investment funds, and potentially enormous scale should keep fees low while allowing the program to be 100% participant-supported.

Small accounts, big numbers

Sure, all these underserved workers can open an IRA right now. But as AARP has found, simply having a retirement savings plan available at work increases employees’ average savings rate by 1,300%. While we wonder how close to zero their baseline number might be, it’s still evidence that something is better than nothing – a lot better. The fact that these plans will typically be provided on an opt-out basis will certainly help too.

As the spokesman for one financial firm in partnership with AARP notes, the program can “also help create a culture of saving and financial literacy” among those most at risk for inadequate retirement income. This may be overly optimistic. But there’s good behavioral evidence that the first step is indeed the hardest, and can lead to lifelong changes in saving and spending habits.

Far from automatic

The concept of the “automatic IRA” is not exactly news, of course. As a Washington Post article points out, the idea has been around at least since 2006, and has consistently (perhaps remarkably) received bipartisan support. The White House has even floated a Treasury-managed variant that we’ve discussed before in this space.

Unfortunately, most of the financial services industry has been wary of the idea. According to the Post’s analysis, this is largely because of concerns about the role of government, especially any possible ‘public option,’ as well as general partisan gridlock. More troublingly, it may also be due to a fear of “new low-cost, high-volume competitors that might develop relationships with people who later graduate to more profitable products.”

Fear is good

That last concern may indeed be valid. But years ago, the same kind of thing was said of low-cost upstarts such as Charles Schwab. Competition and innovation are ultimately healthy for any industry. If what you’re doing makes the big players nervous, that’s usually a sign that you’re on to something good.

Beyond causing a stir among mutual fund companies, automatic IRAs seem to gaining real traction in other quarters. AARP is now leading the charge, and has even gained the support of a few heavy hitters in the mutual fund business. On the legislative side the center of gravity has definitively shifted to the states. AARP reports that more than a dozen state governments have some sort of proposal in the works, with Illinois and Maryland in the forefront.

Something new

Of course, this approach lacks one of the key benefits of employer plans: matching contributions. While we almost take them for granted, these employer subsidies are really just an aspect of the relationship negotiated between employer and employee. We’re (thankfully) not in the business of arguing about who’s entitled to what subsidy. We’re here to help people fund their retirement, and the long-term trend has certainly been toward greater individual responsibility for doing so.

So while we’d like retirement investors to enjoy as many advantages as possible, we’re inclined to see the “Work and Save” initiative not as a watered-down version of the old 401(k), but rather an initial take on something new. We’re all for innovation, cooperation, and anything else that helps support financial freedom for everyone. So we’re all for AARP’s efforts as well – and we think you should be, too.


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