Over the past quarter century, America's pension system has shifted away from defined benefit plans and toward defined contribution savings programs such as 401(k)s and IRAs. There is much to be done to improve the defined contribution system. Many workers fail to participate and those who do often contribute too little, invest the funds poorly, and are not adequately prepared to manage funds while in retirement.
To resolve these problems, the authors propose that employees should be automatically enrolled into a 401(k) plan when they are hired, with the right to opt out, change the amount that they contribute, or change investment choices if they choose. If the employer does not sponsor a 401(k) or similar retirement plan, they would be enrolled in a payroll deduction Automatic IRA. This vision of a transformed defined contribution system incorporates key positive features of defined benefit plans to improve retirement security. Employess contributions would increase over time, their investments would benefit from professional management and rebalancing, and they would receive lifetime income upon retirement. These automatic features will make the 401(k) and similar plans a more effective tool for retirement saving, and they can be extended to the many workers who do not currently have access to an employer plan.
In Automatic, the authors present proposals to implement automatic features in all phases of the 401(k) and in IRAs for workers with no employer plan. They also draw from the experience of countries that have implemented automatic saving structures.