A Mandate to Offer: The Future Path Forward for Expanding Access to Retirement Savings?

By John Mitchem

What is the best public policy for getting workers to save for retirement? Why is it important that they save? What works best: legal requirements that workers contribute to defined benefit (DB) pensions or defined contribution (DC) savings plans, or simple freedom of choice in a retirement system based on “every one for themself”?

A third way — the “mandate to offer” — might define the future of retirement finance.

For a recent convening of the Jasper Forum, a global DC discussion group, Angela Antonelli, Research Professor and Executive Director, Georgetown Center for Retirement Initiatives (CRI), moderated a discussion among a group of retirement finance leaders who have defined and are implementing the concept of a mandate to offer and who continue to drive its evolution. Participants were Helen Dean, former CEO, National Employment Savings Trust (NEST) Corporation; J. Mark Iwry, Nonresident Scholar, the Brookings Institution; David John, Senior Strategic Policy Advisor, AARP; and Richard Linton, President/COO, Empower.

Pillar One: Demographic Shifts Stress Systems

In most countries, “Pillar I” Social Security retirement programs are mandatory, commonly funded by payroll taxes. These systems, developed in many countries in the second half of the 20th century, worked very well for the first few decades, when large numbers of worker contributions helped to support a smaller cohort of retirees

However, cracks began to appear in these systems in the late 1990s, when demographic data made clear that the combination of lower fertility and increased longevity foretold a future with more many more retirees, fewer workers, and thus a steadily declining “support ratio” –– would be placing Social Security systems under actuarial stress.

Pillar Two: To the Rescue?

In the early 1980s, the United States developed its occupational-based system of purely voluntary 401(k)s, individual retirement accounts (IRAs), and similar retirement savings plans. In the early 1990s, Australia launched its mandatory workplace savings “Superannuation” system. At the same time, the United Kingdom (UK) was the first country to initiate a “third way” system between these voluntary and mandatory approaches.

When the UK Department for Work & Pensions (DWP) began contemplating a national DC savings system, it realized that UK policymakers and politicians were not ready for a mandatory retirement savings system modeled after the Australian Superannuation system. Instead, it explored options from the world of behavioral finance, notably research being undertaken by academics, including Shlomo Benartzi, James J. Choi, and Brigitte C. Madrian. DWP also consulted with David John, at the time with the Heritage Foundation, and Iwry, who were developing their own ideas about how behavioral finance might be applied in an automatic enrollment IRA (Auto-IRA) DC savings system in the United States.

The National Employment Savings Trust (NEST) was founded in the UK in 2011 as an automatic enrollment savings system built on the principle of a mandate to offer. UK employers must offer some form of retirement benefit, be it a DB pension or a privately administered DC master trust. If an employer did not choose to adopt its own plan, it could fall back on NEST, which is today the largest master trust in the country, with more than 12 million workers enrolled and more than £36 billion in assets under administration.

After seeing the success of NEST, U.S. policymakers reconsidered the concept of the Auto-IRA previously advanced by Iwry and John in the early 2000s. Although originally intended as a federal model, the Auto-IRA could be adopted by individual states if the federal government continued to fail to act. Consequently, states began to establish their own Auto-IRA programs in Oregon and Illinois beginning in 2017. Today, there are now 17 Auto-IRA programs in the U.S. and, of these new programs, eight now administer more than $1.5 billion in assets (the other programs are still in very early stages of implementation). CalSavers alone administers almost $1 billion of this total.

Because of the success of these new state programs, momentum continues to build for a national auto-IRA program. Congressmember Richard Neal, ranking member of the U.S. Committee on House Ways and Means, has introduced legislation — the Auto-IRA Act of 2024 — to create such a program.

When states began to adopt Auto-IRA programs, with their mandate to offer, many in the U.S. financial services industry viewed them as a possible rival to the private, voluntary 401(k) system, which today comprises nearly 700,000 plans, serving 55 million workers. But today, program participation to date demonstrates that these Auto-IRA programs can be a vital “on-ramp” for workers outside the 401(k) system, as well as an “off-ramp” for workers downscaling their careers or shifting to the contingent labor force.

In addition, more attention is now being paid to the impact that state programs have been having on the U.S. 401(k) employer-based system. Early evidence suggests that when employers must choose something, some are choosing to adopt their own retirement plans, and boosting the rate of new plan formation. The effect of this has been to support the rise of “retire-tech,” with fintech firms offering simplified, cloud-based, “clickable” 401(k)s for small business. The result: a U.S. workplace savings system predicated on the mandate to offer.

In a tight labor market where retirement benefits figure prominently in overall compensation, buoyed by the rise of retire-tech, the U.S. is experiencing the creation of thousands of new 401(k) plans, leading many financial service providers to invest in new technologies and launch business units focused on the burgeoning market for small-company workplace savings plans.

Mandate to Offer: The Future Path Forward?

The mandate to offer concept is emerging as the state of the art in workplace DC plan design. Because the system is voluntary for workers, since they can always choose to opt-out, it supports an individual’s free choice to save. Behavioral defaults, such as automatic enrollment, auto-escalation, the “set it and forget it” target date fund investment allocation, and newly emerging decumulation strategies, are making it easier for workers to engage and remain in their retirement plans and programs.

Also key to the increasing appeal of the mandate to offer concept is that it instills a sense of policy collaboration among workers who now have options for savings, employers who can now benefit from having simpler options they can offer to workers, and policymakers who are increasingly willing to offer tax incentives to encourage new plan adoption and participation.

With these three primary actors in the workplace “rowing the boat in the same direction,” DC workplace savings systems supported by a mandate to offer are emerging as the retirement finance architecture-of-choice in retirement finance systems worldwide.

John Mitchem is the Founder and Principal of JM3 Projects and Co-Founder of the Jasper Forum.

July 2024, 24-04