Last week, we looked at 401(k) catch-up opportunities for workers approaching retirement. We also noted that these benefits apply primarily to people with sufficient income to take full advantage. Disparities across income levels are reinforced by the current system, including the fact that 1 in 3 Americans does not even have access to a company retirement plan.
Today we consider some proposals for improving retirement saving and investment across all incomes. Congress has adopted many positive changes since the original Employee Retirement Income Security Act 50 years ago, but these initiatives have been incremental. With the approaching insolvency of Social Security and the dearth of private retirement savings, a more comprehensive approach is needed. Here are some recent ideas.
About a dozen individual states have experimented with requiring employers with no retirement plan to automatically enroll employees into an IRA account by default and to begin deferring a specified percentage of the employee’s pay into the account. Investment defaults into a target date fund that adjusts asset allocation as the worker gets closer to retirement, but participants are free to select other investments.
Auto-enrollment IRAs would help address the lack of plan coverage for millions of workers but suffers from several deficiencies. The contribution limit for IRAs is just $7,000 compared with the $23,500 cap for 401(k) plans in 2025. There are also no employer matches, and companies with 10 or fewer employees are generally exempted, excluding over 13 million people.
The most disruptive idea comes from Yale University. Researchers there propose the outright elimination of 401(k) plans, replacing them with universal IRA accounts with dramatically increased limits ($30,500 for 2025). Employers would send payroll deductions to the IRA custodian, much like they currently forward deferrals to their 401(k) provider.
The Yale proposal offers a significant reduction in administrative expenses and employer fiduciary liability, greatly expanded investment options and portability during job changes. Employers could also forward matching contributions to the custodian subject to the company’s existing vesting schedule. The proposal would retain the traditional pre-tax and after-tax Roth option.
The idea is still more a theoretical construct and does not specifically address the imperative of supplementing retirement investments for lower income workers.
A more fully formed proposal comes from a collaboration of progressive and conservative economists. Labor economist Teresa Ghilarducci of The New School and Kevin Hassett, former chair of the Council of Economic Advisors under President Trump, offer a more comprehensive proposal to increase coverage to all American workers. They would expand the federal government Thrift Savings Plan to private sector workers, in effect creating a national 401(k).
The Ghilarducci and Hasset plan would also feature automatic enrollment, unless the participant opts out, and a government match up to a limit of 3% to 5%. Auto enrollment and matching contributions have been shown to drastically increase participation rates.
Private employers would be free to contribute additional matching contributions like current 401(k) plans allow.
The Thrift Savings model plan would reduce employer administrative expenses and fiduciary risk associated with choosing available investment options. The current government plan offers several low cost core funds across the risk and return spectrum, as well as a default lifecycle fund option.
Because the Thrift Savings Plan is the largest defined contribution program in the U.S., it uses its bargaining power to minimize investment fees. Average fund expenses are less than 0.05% compared with current employer plan fees of between 0.30% and 1.25%, averaging around 0.6% for mid-sized employers. That fee differential would add tens of thousands of dollars to a retiree’s account over the course of their working life.
Ghilarducci and Hasset estimate that an automatic enrollment plan with a 5% match could increase participation to 95% of all workers including those in the lowest one third of income earners. Currently, nearly half of American employees are not covered, either because they refuse to participate or do not have access.
The authors’ estimates of wealth creation for lower-wage workers are likewise impressive. They consider a median household in the bottom 25% of the wealth distribution with $29,530 of annual income. Assuming a conservative 3% annual return and a 5% match, this worker would amass $227,000 in personal wealth after 40 years. With a 7% annual average investment return, this worker’s personal retirement account could grow to $600,000.
The plan would also include a simple guaranteed lifetime income option at retirement.
The economists offer a preliminary estimate of around $100 billion annual cost to taxpayers. However, it is important to note that the current 401(k) system is both inequitable and unsustainable. The retirement savings deficit deepens each year, and many retirees will need to depend to some degree upon taxpayer support. Employers would benefit from the reduction in administrative and compliance expenses, while participants would enjoy higher net returns after fees and expenses.
Increasing individual retirement investment also boosts net national saving available to reinvest in economic growth. The U.S. currently relies heavily upon capital inflows from foreign investors that would be partially offset by increasing domestic capital formation from additional retirement savings.
The current retirement system is also highly regressive, as around 50% of the $300 billion in tax breaks each year from retirement plan tax preferences goes to the top 25% of income earners. A person in the highest tax bracket earning over $578,000 per year effectively receives a 37% subsidy from taxpayers, including workers without a 401(k). Broadening participation would require consideration of phase-outs above certain income limits to offset some of the cost.
The Thrift Savings-based concept has found expression in a Senate bill co-sponsored by Democrat John Hickenlooper and Republican Thom Tillis, with a bipartisan companion bill in the House. The proposal is unlikely to advance any time soon, but it represents a serious step forward toward a retirement system that is more inclusive and sustainable over the long term that helps all Americans build wealth. It’s a start.
Christopher A. Hopkins, CFA, is co-founder of Apogee Wealth Partners in Chattanooga.